-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LeNBVlG39F2i8jPNgA9XUvY+znb44YLjVMOsH1FkdFB/d1tbKiCEds2v32CWKI/K CWx9Tc+r0KGQ3ct/H+5TKQ== 0000950123-99-009310.txt : 19991018 0000950123-99-009310.hdr.sgml : 19991018 ACCESSION NUMBER: 0000950123-99-009310 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19991014 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFFYMETRIX INC CENTRAL INDEX KEY: 0000913077 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 770319159 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-88987 FILM NUMBER: 99728329 BUSINESS ADDRESS: STREET 1: 3380 CENTRAL EXPRESSWAY CITY: SANTA CLARA STATE: CA ZIP: 95051 BUSINESS PHONE: 4085226000 MAIL ADDRESS: STREET 1: 3380 CENTRAL EXPRESSWAY CITY: SANTA CLARA STATE: CA ZIP: 95051 S-4 1 AFFYMETRIX INC 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 14, 1999 REGISTRATION NO. 333--- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ AFFYMETRIX, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 8731 77-0319159 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
3380 CENTRAL EXPRESSWAY SANTA CLARA, CALIFORNIA 95051 (408) 731-5000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ VERN NORVIEL, ESQ. SENIOR VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY AFFYMETRIX, INC. 3380 CENTRAL EXPRESSWAY SANTA CLARA, CALIFORNIA 95051 (408) 731-5000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ WITH COPIES TO: NEIL T. ANDERSON, ESQ. MICHAEL E. LYTTON, ESQ. SULLIVAN & CROMWELL PALMER & DODGE LLP 125 BROAD STREET ONE BEACON STREET NEW YORK, NEW YORK 10004 BOSTON, MASSACHUSETTS 02108 (212) 558-4000 (617) 573-0100
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement and all other conditions to the merger of Genetic MicroSystems, Inc. with and into GMS Acquisition, Inc. pursuant to the Agreement and Plan of Merger described in the enclosed Proxy Statement/Prospectus have been satisfied or waived. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Securities Act"), check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] --------------- If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] --------------- ------------------------ CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE PRICE(2) REGISTRATION FEE(3) - --------------------------------------------------------------------------------------------------------------------------------- Common Stock, par value $0.01 per share, together with attached rights to purchase Series B Junior Participating Preferred Stock.......................................... 1,070,000 N.A. $8,513.91 $2.37 - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) This Registration Statement relates to common stock, par value $0.01 per share, together with attached rights to purchase Series B Junior Participating Preferred Stock, of the Registrant, Affymetrix, Inc., estimated to be issuable upon the consummation of the merger of Genetic MicroSystems, Inc., a Massachusetts corporation, with and into GMS Acquisition, Inc., a Massachusetts corporation, pursuant to the Agreement and Plan of Merger, dated as of September 10, 1999, by and among Genetic MicroSystems, Inc., Affymetrix, Inc., GMS Acquisition, Inc., Jean Montagu as Stockholder Representative, and the stockholders of Genetic MicroSystems, Inc. set forth in the signature pages to that document. (2) Genetic MicroSystems, Inc. is a privately held corporation and there is no market for its securities. Pursuant to Rule 457(f)(2) of the Securities Act of 1933, as amended, the proposed maximum aggregate offering price is based upon the book value of the securities of Genetic MicroSystems, Inc. being acquired in the proposed merger. The book value of the securities of Genetic MicroSystems being acquired in the proposed merger was determined as of October 13, 1999 and is a negative number. Since Genetic MicroSystems has an accumulated capital deficit, pursuant to Rule 457(f)(2) of the Securities Act, one-third of the principal amount, par value or stated capital of Genetic MicroSystems' securities is used. The Genetic MicroSystems' shares of common stock have no par value and no stated capital and the Genetic MicroSystems' shares of convertible preferred stock have a par value of $0.01 per share. The number of Genetic MicroSystems' shares of convertible preferred stock outstanding and subject to warrants as of October 13, 1999, is 2,554,174. The proposed maximum aggregate offering price is equal to: (i) 2,554,174 multiplied by (ii) 0.01 and divided by (iii) 3. (3) Calculated by multiplying .000278 by the proposed maximum aggregate offering price. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 [GENETIC MICROSYSTEMS LOGO] 34 COMMERCE WAY WOBURN, MASSACHUSETTS 01801 ------------------------- To the Stockholders of Genetic MicroSystems, Inc.: Genetic MicroSystems, Inc. has entered into a merger agreement with Affymetrix, Inc. Under that agreement, Genetic MicroSystems would become a wholly owned subsidiary of Affymetrix. In the merger, Affymetrix will issue up to 1,070,000 shares of its common stock, representing less than 4% of the outstanding Affymetrix common stock after the merger. For each share of Genetic MicroSystems stock that you own, you will be entitled to receive a fraction of a share of Affymetrix common stock determined by dividing 1,070,000 by the number of outstanding shares of Genetic MicroSystems common stock and convertible preferred stock and the outstanding options and warrants to purchase Genetic MicroSystems common stock and convertible preferred stock immediately before the effective time of the merger. In addition, 10% of the shares to be issued at the closing of the merger will be placed on a pro-rata per stockholder basis in an escrow fund to satisfy certain indemnification obligations of Genetic MicroSystems. The merger has been structured with the intent that you will not recognize gain or loss for federal income tax purposes on the receipt of Affymetrix common stock in exchange for your Genetic MicroSystems shares. A more detailed discussion of the material federal income tax consequences of the merger is contained in the accompanying proxy statement/prospectus. Your Board of Directors has scheduled a special meeting of stockholders to be held on --, 1999 at Genetic MicroSystems headquarters, 34 Commerce Way, Woburn, Massachusetts 01801, commencing at 10:00 a.m. local time to vote for adoption of the merger agreement and the appointment of a stockholder representative. YOUR BOARD OF DIRECTORS HAS CAREFULLY CONSIDERED THE TERMS OF THE PROPOSED MERGER, HAS DETERMINED THAT THE MERGER AGREEMENT AND THE MERGER ARE IN THE BEST INTERESTS OF GENETIC MICROSYSTEMS AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR: ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER; THE PROPOSAL THAT THE MERGER DOES NOT CONSTITUTE A LIQUIDATION, DISSOLUTION OR WINDING UP OF GENETIC MICROSYSTEMS; AND APPOINTMENT OF JEAN MONTAGU AS STOCKHOLDER REPRESENTATIVE. I, together with five other stockholders of Genetic MicroSystems, who together with me beneficially own and have voting control over approximately 69.5% of the outstanding shares of Genetic MicroSystems common stock and approximately 72% of the outstanding shares of Genetic MicroSystems convertible preferred stock, have agreed to vote for adoption of the merger proposals. These shares represent more than the number of votes necessary to adopt the merger agreement and approve the merger. Please complete, sign and date the enclosed proxy card and return it in the enclosed self-addressed and stamped envelope, even if you plan to attend the special meeting. If you sign, date and mail your proxy card without indicating how you wish to vote, your proxy will be counted as a vote in favor of adopting the merger proposals. We appreciate your support in this very important transaction. We are very enthusiastic about the merger with Affymetrix, and are confident that the combined company will grow and prosper in a competitive marketplace. On behalf of the board of directors of Genetic MicroSystems, I urge you to vote "FOR" approval of the merger proposals. PLEASE READ THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS CAREFULLY FOR DETAILED INFORMATION ABOUT THE PROPOSED MERGER CAREFULLY AND TO CONSIDER THE RISK FACTORS RELATING TO THE MERGER BEGINNING ON PAGE 21 OF THE PROXY STATEMENT/PROSPECTUS. Sincerely, /s/ Jean Montagu Jean Montagu President and Chief Executive Officer 3 [GENETIC MICROSYSTEMS LOGO] 34 COMMERCE WAY WOBURN, MASSACHUSETTS 01801 ------------------------- NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON --, 1999 TO THE STOCKHOLDERS OF GENETIC MICROSYSTEMS, INC.: NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Genetic MicroSystems, Inc. will be held on --, 1999, at 10:00 a.m., local time, at the offices of Genetic MicroSystems located at 34 Commerce Way, Woburn, Massachusetts 01801, for the following purposes: 1. To consider and vote upon a proposal to adopt the Agreement and Plan of Merger, dated as of September 10, 1999, by and among Affymetrix, Inc., a Delaware corporation, GMS Acquisition, Inc., a Massachusetts corporation wholly owned directly by Affymetrix, Genetic MicroSystems, Inc., a Massachusetts corporation, Jean Montagu as Stockholder Representative and the stockholders of Genetic MicroSystems, Inc. listed in the signature pages of that document, pursuant to which, among other things: - Each outstanding share of Genetic MicroSystems common stock and convertible preferred stock will be converted into the right to receive a fraction of a share of Affymetrix common stock, based on an exchange ratio described in the accompanying proxy statement/prospectus. - Genetic MicroSystems will be merged with and into GMS Acquisition, Inc. as a result of which Genetic MicroSystems will become a wholly owned subsidiary of Affymetrix. - Affymetrix will assume each outstanding option and warrant to purchase Genetic MicroSystems common stock or convertible preferred stock, which will be converted into an option or warrant to purchase a fraction of a share of Affymetrix common stock. - 10% of the shares to be issued at the closing of the merger will be placed into an escrow fund. 2. To have the holders of shares of Genetic MicroSystems Series A convertible preferred stock vote on the proposal that the merger does not constitute a liquidation, dissolution or winding up of Genetic MicroSystems. 3. To appoint Jean Montagu as Stockholder Representative to act on behalf of the current Genetic MicroSystems stockholders in connection with the escrow fund established pursuant to the terms of the merger agreement and the escrow agreement. 4. To transact such other business as may properly come before the special meeting or any adjournment(s) of the special meeting. 4 Stockholders of record at the close of business on --, 1999 are entitled to notice of, and to vote at, the special meeting and any adjournment or postponement of the special meeting. Each holder of record of common stock and convertible preferred stock on such record date will be entitled to one vote for each share held on each matter to be acted upon at the special meeting, except with respect to Item 2, with respect to which only holders of Genetic MicroSystems Series A convertible preferred stock will be entitled to vote. THE BOARD OF DIRECTORS OF GENETIC MICROSYSTEMS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR: ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER; THE PROPOSAL THAT THE MERGER DOES NOT CONSTITUTE A LIQUIDATION, DISSOLUTION OR WINDING UP OF GENETIC MICROSYSTEMS; AND APPOINTMENT OF JEAN MONTAGU AS STOCKHOLDER REPRESENTATIVE. Please complete, sign, date and promptly return the enclosed proxy card in the enclosed self-addressed and stamped envelope even if you plan to attend the special meeting. If you decide to attend the special meeting you may vote in person even if you have returned a proxy. Holders of outstanding shares of Genetic MicroSystems common stock and convertible preferred stock have the right to dissent from the merger and, subject to certain conditions, receive payment for their shares. These rights are described in greater detail in the accompanying proxy statement/prospectus under the caption "Appraisal Rights" and are set forth in full in Appendix E to the attached document. PLEASE DO NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY AT THIS TIME. By Order of the Board of Directors, /s/ Peter Lewis Peter Lewis Corporate Clerk of Genetic MicroSystems, Inc. Woburn, Massachusetts , 1999 5 THIS DOCUMENT AND THE INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS DOCUMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. Subject to completion, dated October 14, 1999 [AFFYMETRIX GENECHIP LOGO][GENETIC MICROSYSTEMS, INC. LOGO] PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS OF GENETIC MICROSYSTEMS, INC. PROSPECTUS OF AFFYMETRIX, INC. UP TO 1,070,000 SHARES OF COMMON STOCK Affymetrix, Inc. and Genetic MicroSystems, Inc. have entered into a merger agreement. As a result of the merger, Genetic MicroSystems will become a wholly owned subsidiary of Affymetrix. Pursuant to the terms of the merger agreement, Affymetrix will exchange an aggregate of up to 1,070,000 shares of Affymetrix common stock for all the outstanding common stock and convertible preferred stock of Genetic MicroSystems and all shares issuable upon exercise of all outstanding options and warrants to acquire Genetic MicroSystems stock. Based on the number of Genetic MicroSystems shares, and vested and unvested options or warrants outstanding as of October 13, stockholders of Genetic MicroSystems will receive approximately 0.2832 of a share of Affymetrix common stock for each share of Genetic MicroSystems common stock or convertible preferred stock. This exchange ratio, however, is subject to reduction if Genetic MicroSystems issues or grants additional shares, options or warrants in the ordinary course of business prior to the effective time of the merger. In addition, pursuant to the terms of the merger agreement and an escrow agreement, 10% of the aggregate number of shares of Affymetrix common stock to be delivered by Affymetrix at the closing of the merger will be placed in an escrow fund to satisfy certain indemnification obligations of Genetic MicroSystems. See "The Merger Agreement -- Indemnification and Liability Obligations" on page 64 and "Escrow Agreement" on page 68. The merger is intended to qualify as a tax-free reorganization and to be accounted for as a pooling-of-interests. See "The Merger -- Material Federal Income Tax Consequences" on page 49 and "The Merger -- Accounting Treatment" on page 51. THE BOARD OF DIRECTORS OF GENETIC MICROSYSTEMS UNANIMOUSLY RECOMMENDS THAT GENETIC MICROSYSTEMS STOCKHOLDERS VOTE FOR: ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER; THE PROPOSAL THAT THE MERGER DOES NOT CONSTITUTE A LIQUIDATION, DISSOLUTION OR WINDING UP OF GENETIC MICROSYSTEMS; AND APPOINTMENT OF JEAN MONTAGU AS STOCKHOLDER REPRESENTATIVE. Massachusetts law is applicable to the merger and requires that the merger agreement be approved by the affirmative vote of two-thirds of the shares of each class of stock of Genetic MicroSystems. Affymetrix has entered into stockholder voting agreements with Jean Montagu, the Chairman, Chief Executive Officer and founder of Genetic MicroSystems, and with five other stockholders of Genetic MicroSystems who are all either family members of Jean Montagu or executive officers or directors of Genetic MicroSystems. These six stockholders, who together beneficially own and have voting control over approximately 69.5% of the shares of Genetic MicroSystems common stock and approximately 72% of the shares of Genetic MicroSystems convertible preferred stock, have agreed to vote for adoption of the merger proposals and their shares represent more than the number of votes necessary to adopt the merger agreement and approve the merger. Affymetrix is a Delaware corporation and the shares of Affymetrix common stock trade on the NASDAQ National Market under the symbol "AFFX." Genetic MicroSystems is a privately held Massachusetts corporation with fewer than ninety stockholders. THIS DOCUMENT PROVIDES YOU WITH DETAILED INFORMATION ABOUT THE MERGER AGREEMENT AND THE PROPOSED MERGER. AFFYMETRIX PROVIDED THE INFORMATION CONCERNING AFFYMETRIX. GENETIC MICROSYSTEMS PROVIDED THE INFORMATION CONCERNING GENETIC MICROSYSTEMS. PLEASE SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 94 FOR ADDITIONAL INFORMATION ON AFFYMETRIX. WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS DOCUMENT IN ITS ENTIRETY, INCLUDING THE MATTERS REFERRED TO UNDER "RISK FACTORS" BEGINNING ON PAGE 21. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We are first mailing this proxy statement/prospectus dated --, 1999 and the form of proxy on or about --, 1999. 6 TABLE OF CONTENTS
PAGE ---- Questions and Answers About the Merger............................ ii Summary............................. 1 Recent Developments................. 12 Summary of Selected Historical Information of Affymetrix......... 13 Summary of Selected Historical Financial Data of Genetic MicroSystems...................... 14 Pro Forma Combined Financial Information of Affymetrix......... 15 Unaudited Selected Pro Forma Condensed Combined Financial Data.............................. 16 Comparative Per Share Information... 17 Market Price and Dividend Information....................... 19 Risk Factors........................ 21 Cautionary Statement Concerning Forward-Looking Statements........ 39 The Companies....................... 39 The Genetic Microsystems Special Meeting........................... 41
PAGE ---- Appraisal Rights.................... 43 The Merger.......................... 45 The Merger Agreement................ 53 Stock Option Agreement.............. 66 Escrow Agreement.................... 68 Stockholder Voting Agreements....... 69 Stock Ownership of Directors, Executive Officers and Principal Stockholders...................... 70 Interests of Certain Persons in the Merger............................ 72 Genetic Microsystems' Management's Discussion and Analysis of the Financial Condition and Results of Operation......................... 75 Description of Affymetrix Capital Stock............................. 78 Comparison of Stockholder Rights.... 84 Validity of Shares.................. 94 Experts............................. 94 Where You Can Find More Information....................... 94
LIST OF APPENDICES Appendix A -- Agreement and Plan of Merger, dated as of September 10, 1999, by and among Affymetrix, Inc., GMS Acquisition, Inc., Genetic MicroSystems, Inc., Jean Montagu, as Stockholder Representative, and the stockholders of Genetic MicroSystems, Inc. listed in the signature pages thereto Appendix B -- Stock Option Agreement, dated as of September 10, 1999, between Affymetrix, Inc. and Genetic MicroSystems, Inc. Appendix C -- Escrow Agreement, dated as of September 10, 1999, among Genetic MicroSystems, Inc., Affymetrix, Inc., GMS Acquisition, Inc., Jean Montagu, as Stockholder Representative, and Bank One Trust Company, N.A., as Escrow Agent Appendix D -- Form of Stockholder Voting Agreement Appendix E -- Sections 85 through 98 of the Massachusetts Business Corporation Law Regarding Appraisal Rights Appendix F -- Genetic MicroSystems' Audited Financial Statements for the Year Ended December 31, 1998 and the period from August 7, 1997 (date of inception) to December 31, 1997, and Unaudited Condensed Financial Statements for the Six Months ended July 3, 1999 and June 30, 1998 i 7 QUESTIONS AND ANSWERS ABOUT THE MERGER Q: WHAT WILL I RECEIVE IN THE MERGER? A: If the merger agreement is adopted, Affymetrix will exchange an aggregate of up to 1,070,000 shares of Affymetrix common stock for all the Genetic MicroSystems common and convertible preferred shares: - issued and outstanding immediately prior to the effective time of the merger; and - subject to options or warrants immediately prior to the effective time of the merger, whether vested or unvested or currently exercisable or unexercisable. The number of Affymetrix shares to be received by each Genetic MicroSystems stockholder will be calculated immediately prior to the effective time of the merger by dividing 1,070,000 by the aggregate number of the Genetic MicroSystems shares issued and outstanding and Genetic MicroSystems shares subject to Genetic MicroSystems options or warrants. Each outstanding option or warrant to purchase Genetic MicroSystems common stock or convertible preferred stock, will be converted into an option or warrant to acquire the number of shares of Affymetrix common stock that the holder would have received in the merger if the holder had exercised the option or warrant immediately prior to the closing of the merger and the exercise price will be adjusted appropriately. You will not receive fractional shares of Affymetrix common stock. Instead, you will receive the cash value, without interest, of any fractional share of Affymetrix common stock that you might otherwise have been entitled to receive. Q: AS A GENETIC MICROSYSTEMS STOCKHOLDER, DO I HAVE TO ACCEPT AFFYMETRIX COMMON STOCK IN EXCHANGE FOR MY GENETIC MICROSYSTEMS SHARES IF THE MERGER IS APPROVED? A: No. If you are a Genetic MicroSystems stockholder and you follow the procedures prescribed by Massachusetts law, including filing a written objection with Genetic MicroSystems prior to the special meeting and refraining from voting for adoption of the merger agreement, you may dissent from the merger and have the fair value of your stock appraised by a court and paid in cash. If you follow those procedures, you will not receive Affymetrix common stock. The fair value of your Genetic MicroSystems stock, determined in the manner prescribed by Massachusetts law, will be paid to you in cash. You may be required in this case to pay federal taxes on the amount of cash you receive. For a more complete description of these appraisal rights, see "Appraisal Rights" on page 43 and Appendix E to this document. Q: WHAT DO I NEED TO DO NOW? A: Just indicate on your proxy card how you want to vote, and sign and mail it in the enclosed self-addressed and stamped envelope as soon as possible, so that your shares may be represented at the special meeting. If you sign and send in your proxy and do not indicate how you want to vote, your proxy will be counted as a vote FOR adoption of the merger agreement. If you do not vote or you abstain, it will have the effect of a vote against the merger agreement. The special meeting will take place on --, 1999 at 10:00 a.m., local time at Genetic MicroSystems' executive offices, 34 Commerce Way, Woburn, Massachusetts 01801. If you wish, you may attend the special meeting and vote your shares in person rather than signing and mailing your proxy card. IF YOU DO NOT ATTEND THE ii 8 SPECIAL MEETING IN PERSON, YOUR PROXY MUST BE RECEIVED ON OR PRIOR TO -- IN ORDER FOR YOUR SHARES TO BE VOTED AT THE SPECIAL MEETING. Q: WHAT IS THE RECOMMENDATION OF THE BOARD OF DIRECTORS OF GENETIC MICROSYSTEMS? A: THE BOARD OF DIRECTORS OF GENETIC MICROSYSTEMS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR: ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER; THE PROPOSAL THAT THE MERGER DOES NOT CONSTITUTE A LIQUIDATION, DISSOLUTION OR WINDING UP OF GENETIC MICROSYSTEMS; AND APPOINTMENT OF JEAN MONTAGU AS STOCKHOLDER REPRESENTATIVE. Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW? A: No. After the merger is completed, we will send you written instructions for exchanging your stock certificates. Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD? A: You can change your vote at any time before your proxy is voted at the special meeting. You can do this in one of the following three ways: - you can send a written notice signed by you stating that you would like to revoke your proxy. If you choose this method, you must submit your notice of revocation to Genetic MicroSystems at 34 Commerce Way, Woburn, Massachusetts 01801, Attention: Peter Lewis, Clerk; - you can complete and submit a new proxy card. If you choose this method, you must submit your new proxy card to Genetic MicroSystems at 34 Commerce Way, Woburn, Massachusetts 01801, Attention: Peter Lewis, Clerk; or - you can attend the special meeting and vote in person. Simply attending the special meeting, however, will not revoke your proxy; you must vote at the special meeting. Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED? A: Affymetrix and Genetic MicroSystems are working towards completing the merger in or before January, 2000. Genetic MicroSystems must obtain stockholder approval and intends to complete the merger as soon as possible after the special meeting. The merger agreement may be terminated if the merger is not consummated by February 15, 1999. Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME? A: The merger has been structured with the intent that you will not recognize gain or loss for federal income tax purposes on your receipt of Affymetrix common stock in exchange for your shares of Genetic MicroSystems stock. To review the tax consequences to stockholders in greater detail, see "The Merger -- Material Federal Income Tax Consequences" on page 49. Q: ARE THERE ANY RISKS RELATED TO THE PROPOSED TRANSACTION OR ANY RISKS RELATED TO OWNING AFFYMETRIX COMMON STOCK? A: Yes, there are substantial risks to the transaction and ownership of Affymetrix common stock. You should carefully review the risk factors described beginning on page 21. Q: WHAT HAPPENS AS THE MARKET PRICE OF AFFYMETRIX COMMON STOCK FLUCTUATES? A: The maximum number of shares of Affymetrix common stock to be distributed to the Genetic MicroSystems stockholders is fixed at 1,070,000. This number includes shares of Affymetrix common stock to be issued at the closing of the merger as well as shares of Affymetrix common stock that iii 9 will be subject to the options and warrants that Affymetrix is assuming in the merger. Since the market value of Affymetrix common stock will fluctuate before and after the closing of the merger, the value of the shares of Affymetrix common stock that Genetic MicroSystems stockholders will receive in the merger will fluctuate as well and could increase or decrease significantly. iv 10 This document incorporates by reference important business and financial information about Affymetrix that is not included in, or delivered with, this document. Affymetrix will provide you with copies of the information relating to Affymetrix that have been incorporated by reference, without charge, upon written or oral request to: AFFYMETRIX, INC. CORPORATE SECRETARY 3380 CENTRAL EXPRESSWAY SANTA CLARA, CALIFORNIA 95051 (408) 731-5000 Genetic MicroSystems is a privately held corporation that is not subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and therefore does not incorporate information in this document by reference unless such information appears in an Appendix to this document. v 11 SUMMARY This summary highlights selected information from this document and may not contain all of the information that is important to you. To understand the merger fully, you should read carefully this entire document and the documents we refer to in this document. See "Where You Can Find More Information" on page 94. The merger agreement is attached as Appendix A to this document. We encourage you to read it, as well as the documents attached as Appendices B through E as these are important legal documents that govern the merger. We have included page references to other parts of this document in parentheses to direct you to a more complete description of the topics presented in this summary. THE COMPANIES (PAGE 39) AFFYMETRIX, INC. 3380 Central Expressway Santa Clara, California 95051 (408) 731-5000 Affymetrix is in the business of developing and commercializing DNA probe array technology and systems for the acquisition, analysis and management of complex genetic data in order to facilitate and improve the diagnosis, monitoring and treatment of disease. Shares of Affymetrix common stock trade on the NASDAQ National Market under the symbol "AFFX". GENETIC MICROSYSTEMS, INC. 34 Commerce Way Woburn, Massachusetts 01801 (781) 932-9333 Genetic MicroSystems is a privately held corporation with fewer than ninety stockholders primarily engaged in the manufacture of biotechnology research equipment. GMS ACQUISITION, INC. 3380 Central Expressway Santa Clara, California 95051 (408) 731-5000 GMS Acquisition is a wholly owned subsidiary of Affymetrix. If we complete the merger, Genetic MicroSystems will be merged into GMS Acquisition. GMS Acquisition was organized for use in the merger and will be the successor to Genetic MicroSystems. It is anticipated that, at the effective time of the merger, GMS Acquisition will be renamed Genetic MicroSystems, Inc. GENETIC MICROSYSTEMS' REASONS FOR THE MERGER (PAGE 48) Genetic MicroSystems' board of directors believes that the merger is in the best interests of Genetic MicroSystems and its stockholders. In reaching its decision to approve the merger, Genetic MicroSystems' board of directors considered a number of factors, including the belief of the Genetic MicroSystems board of directors: - - that the markets addressed by Genetic MicroSystems and Affymetrix are complementary and that customers would be beneficially served by a broad solution to their microarray needs and through expansion of the total market; - - that synergies exist between Genetic MicroSystems and Affymetrix with regard to instrumentation development as well as expansion of the sales, service and customer support network; - - that Affymetrix owns and has rights to considerable intellectual property that Genetic MicroSystems could obtain rights to, thus enabling a greater freedom to serve its customers efficiently; - - that the merger would provide access to capital resources needed to compete in this rapidly expanding marketplace; - - that, through a tax-free reorganization, the opportunity to own stock of the combined 1 12 entity would provide stockholders with greater liquidity and a possibility of a better return on stockholder investment; - - information relating to the business, assets, management, competitive position, operating performance, trading performance and prospects of each of Genetic MicroSystems and Affymetrix, including the prospects of Genetic MicroSystems if it were to continue as an independent company; - - the current and historical market prices of the Affymetrix common stock and the risks associated with ownership of Affymetrix common stock; - - the possibility of strategic alternatives to the merger for enhancing long-term stockholder value; - - the impact of the merger on Genetic MicroSystems' and Affymetrix' customers, suppliers and employees; - - the likelihood that the merger would be completed; - - the terms of the merger agreement, including balanced representations and warranties, balanced conditions to closing and rights of termination, and provisions permitting the Genetic MicroSystems board of directors to terminate the merger agreement in response to a third party proposal which the Genetic MicroSystems board of directors determines in its good faith judgment to be more favorable to Genetic MicroSystems stockholders than the merger; - - the expected qualification of the merger as a reorganization under Section 368(a) of the Internal Revenue Code; - - the risk that the operations of Affymetrix and Genetic MicroSystems might not be successfully integrated; - - the risk that, despite the efforts of Affymetrix and Genetic MicroSystems after the merger, key personnel might leave the combined company; - - the difficulty of managing operations in the different geographic locations in which Genetic MicroSystems and Affymetrix operate and will continue to operate; and - - the risk that the potential benefits of the merger might not be fully realized. RECOMMENDATION OF THE GENETIC MICROSYSTEMS BOARD (PAGE 48) THE BOARD OF DIRECTORS OF GENETIC MICROSYSTEMS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR: ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER; THE PROPOSAL THAT THE MERGER DOES NOT CONSTITUTE A LIQUIDATION, DISSOLUTION OR WINDING UP OF GENETIC MICROSYSTEMS; AND APPOINTMENT OF JEAN MONTAGU AS STOCKHOLDER REPRESENTATIVE. DATE, TIME AND PLACE OF THE SPECIAL MEETING (PAGE 41) The special meeting will be held on --, at 10:00 a.m., local time, at Genetic MicroSystems' executive offices, 34 Commerce Way, Woburn, Massachusetts 01801. STOCKHOLDERS ENTITLED TO VOTE AT THE SPECIAL MEETING; VOTE REQUIRED (PAGE 41) The close of business on --, 1999 was the record date for the special meeting. Only Genetic MicroSystems stockholders on the record date are entitled to notice of and to vote at the special meeting. On the record date, there were 1,006,702 shares of Genetic MicroSystems common stock and 2,431,977 shares of Genetic MicroSystems Series A and Series B convertible preferred stock outstanding. At the special meeting, the merger agreement must be adopted by the vote of the holders of: - - two-thirds of the shares of Genetic MicroSystems common stock outstanding and entitled 2 13 to vote as of the record date for the special meeting; - - two-thirds of the shares of Genetic MicroSystems convertible preferred stock outstanding and entitled to vote as of the record date for the special meeting; and - - a majority of the shares of Genetic MicroSystems Series A convertible preferred stock outstanding and entitled to vote as of the record date for the special meeting. The affirmative vote of a majority of the shares of Genetic MicroSystems Series A convertible preferred stock outstanding and entitled to vote as of the record date for the special meeting will also have to be obtained to the effect that the merger does not constitute a liquidation, dissolution or winding up of Genetic MicroSystems. In addition, the affirmative vote of a majority of Genetic MicroSystems common stock and convertible preferred stock, taken as a class, will have to be obtained to appoint Jean Montagu as stockholder representative to act on behalf of the current Genetic MicroSystems stockholders in connection with the escrow fund established pursuant to the merger agreement and the escrow agreement. Each share of Genetic MicroSystems common and convertible preferred stock will be entitled to one vote on each matter to be acted upon at the special meeting, except with respect to the proposal that the merger does not constitute a liquidation, with respect to which only holders of Genetic MicroSystems Series A convertible preferred stock will be entitled to vote. Affymetrix has entered into stockholder voting agreements with Jean Montagu, the Chairman, Chief Executive Officer and founder of Genetic MicroSystems, and with five other stockholders of Genetic MicroSystems who are all either family members of Jean Montagu or executive officers or directors of Genetic MicroSystems. These six stockholders, who together beneficially own and have voting control over approximately 69.5% of the shares of Genetic MicroSystems common stock and approximately 72% of the shares of Genetic MicroSystems convertible preferred stock, have agreed to vote for adoption of the merger proposals and their shares represent more than the number of votes necessary to adopt the merger agreement and approve the merger. STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS/INTERESTS OF CERTAIN PERSONS (PAGES 70 AND 72) When considering the recommendation by the board of directors of Genetic MicroSystems to vote FOR adoption of the merger agreement, you should be aware that certain directors and executive officers of Genetic MicroSystems have interests in the merger that may be different from your interests. Certain directors, officers and employees of Genetic MicroSystems who hold stock subject to repurchase rights pursuant to existing plans will receive certain benefits upon completion of the merger, including elimination of those repurchase rights. Genetic MicroSystems' board of directors was aware of these interests and considered them in approving the merger agreement. As of the record date for the special meeting, the directors and executive officers of Genetic MicroSystems, as a group, beneficially owned approximately - --% of the outstanding Genetic MicroSystems common stock and approximately --% of the outstanding Genetic MicroSystems convertible preferred stock. OWNERSHIP OF AFFYMETRIX FOLLOWING THE MERGER Genetic MicroSystems stockholders collectively will receive a total of up to 1,070,000 shares of Affymetrix common stock in the merger. This number includes shares of Affymetrix common stock to be issued at the closing of the merger as well as shares of Affymetrix common stock that will be subject 3 14 to the options and warrants that Affymetrix is assuming in the merger. Based on that number, and based on the number of shares of Affymetrix common stock outstanding as of October 13, existing Genetic MicroSystems stockholders will own less than 4% of the Affymetrix common stock outstanding immediately after the merger. NASDAQ TRADING (PAGE 52) It is a condition to the merger that Affymetrix file the appropriate notification form for quotation of Affymetrix common stock to be issued in the merger with the NASDAQ National Market and pay the applicable fee. Therefore, prior to consummation of the merger, Affymetrix common stock to be issued in connection with the merger will be approved for quotation on the NASDAQ National Market. If we complete the merger, you will be able to trade the shares of Affymetrix common stock you receive in the merger on the NASDAQ National Market. Genetic MicroSystems is a privately held company with fewer than ninety stockholders and is not listed on any exchange, quoted on any trading market or subject to reporting requirements under the Securities Exchange Act. THE MERGER AGREEMENT (PAGE 53) The Merger Agreement is attached as Appendix A to this document. We encourage you to read the merger agreement. It is an important legal document that governs the merger. THE MERGER (PAGE 45) In the merger, Genetic MicroSystems will be merged with and into GMS Acquisition. GMS Acquisition will be the surviving corporation and will remain a wholly owned subsidiary of Affymetrix. At the effective time of the merger, it is anticipated that GMS Acquisition will be renamed Genetic MicroSystems, Inc. Affymetrix will exchange an aggregate of up to 1,070,000 shares of Affymetrix common stock for all the Genetic MicroSystems common and convertible preferred shares: - - issued and outstanding immediately prior to the effective time of the merger; and - - subject to options or warrants immediately prior to the effective time of the merger, whether vested or unvested or currently exercisable or unexercisable. EXCHANGE RATIO The number of Affymetrix shares to be received by each Genetic MicroSystems stockholder will be calculated immediately prior to the effective time of the merger by dividing 1,070,000 by the aggregate number of the Genetic MicroSystems shares issued and outstanding and Genetic MicroSystems shares subject to options or warrants. Each outstanding option or warrant to purchase Genetic MicroSystems common stock or convertible preferred stock, will be converted into an option or warrant to acquire the number of shares of Affymetrix common stock that the holder would have received in the merger if the holder had exercised the option or warrant immediately prior to the closing of the merger and the exercise price will be adjusted appropriately. You will not receive fractional shares of Affymetrix common stock. Instead, you will receive the cash value, without interest, of any fractional share of Affymetrix common stock you might otherwise have been entitled to receive. For example, if you are entitled to receive 100.10 shares of Affymetrix common stock, you will receive a certificate for 100 shares of Affymetrix common stock, and cash representing the value of a tenth of a share of Affymetrix common stock. To obtain this cash amount, the exchange agent will sell all fractional shares shortly after the merger so the amount of money to be distributed in lieu of 4 15 fractional shares will depend on the trading price of Affymetrix common stock at that time. CONDITIONS TO THE MERGER (PAGE 55) We will complete the merger only if we satisfy or waive several conditions, including the following: - - The merger agreement must be approved by vote of the holders of: - two-thirds of the shares of Genetic MicroSystems common stock outstanding and entitled to vote as of the record date for the special meeting, - two-thirds of the shares of Genetic MicroSystems convertible preferred stock outstanding and entitled to vote as of the record date for the special meeting, and - a majority of the shares of Genetic MicroSystems Series A convertible preferred stock outstanding and entitled to vote as of the record date for the special meeting; - - the affirmative vote of a majority of the shares of Genetic MicroSystems Series A convertible preferred stock outstanding and entitled to vote as of the record date for the special meeting shall have been obtained to the effect that the merger does not constitute a liquidation, dissolution or winding up of Genetic MicroSystems; - - the appropriate notification form for quotation of Affymetrix common stock to be issued in the merger shall have been filed with the NASDAQ National Market and the applicable fee shall have been paid by Affymetrix; - - the waiting period applicable to the consummation of the merger under the Hart-Scott-Rodino Antitrust Improvements Act shall have expired or been terminated and all notices or other filings required to be made prior to the effective time with any governmental entity, and all consents, permits and authorizations required to be obtained prior to the effective time from any governmental entity in connection with the execution and delivery of the merger agreement and the consummation of the merger shall have been made or obtained; - - there must be no court order or law in effect that prohibits the merger or makes the merger illegal; - - each of Affymetrix and Genetic MicroSystems must receive a letter, dated as of the closing date, from Ernst & Young LLP regarding the appropriateness of pooling-of-interests accounting for the merger under Accounting Principles Board Opinion No. 16 if closed and consummated in accordance with the merger agreement; - - each of Affymetrix and Genetic MicroSystems must certify to the other that its representations and warranties contained in the merger agreement are true and correct except for breaches of representations and warranties as of the closing date of the merger that do not relate to matters that are reasonably likely to have a material adverse effect on the representing party; - - each of Genetic MicroSystems and Affymetrix must certify to each other that it has performed in all material respects all obligations required to be performed under the merger agreement; - - Affymetrix and Genetic MicroSystems must each receive a legal opinion confirming that the merger will qualify as a tax-free reorganization; - - Affymetrix and Genetic MicroSystems must obtain the consent or approval of each person whose consent or approval is required under any material contract to which Affymetrix, its subsidiaries or Genetic MicroSystems is a party; and - - Affymetrix must have received the resignations of each director of Genetic MicroSystems. 5 16 TERMINATION, AMENDMENT OR WAIVER (PAGE 62) Affymetrix and Genetic MicroSystems can agree to terminate the merger agreement without completing the merger, and either company can terminate the merger agreement if any of the following occurs: - - the merger is not completed by February 15, 2000, provided that the right to terminate after such date will not be available to any party that has breached in any material respect its obligations under the merger agreement in any manner that shall have proximately contributed to the occurrence of the failure of the merger to be consummated; - - the requisite approval of the Genetic MicroSystems stockholders has not been obtained at a meeting duly convened for such purpose; or - - any order permanently restraining, enjoining or otherwise prohibiting the merger shall become final and non-appealable. In addition, Genetic MicroSystems may terminate the merger agreement as a result of an acquisition proposal from a potential acquiror if: - - Genetic MicroSystems is not in breach of any of the terms of the merger agreement; and - The board of directors of Genetic MicroSystems authorizes, subject to the terms of the merger agreement, Genetic MicroSystems to enter into a binding written agreement concerning a superior proposal, and Genetic MicroSystems notifies Affymetrix in writing that it intends to enter into such an agreement, attaching the most current version of such agreement to such notice; and - Affymetrix does not make, within five business days of receipt of Genetic MicroSystems' written notification of its intention to enter into such an agreement, an offer that the Genetic MicroSystems board of directors determines is at least as favorable, from a financial point of view, to the stockholders of Genetic MicroSystems as the proposal as to which Genetic MicroSystems gave notice; and - Genetic MicroSystems pays to Affymetrix, prior to such termination, in immediately available funds the termination and expense fees that are discussed below under the heading "The Merger -- The Merger Agreement: Termination Fee and Expense Reimbursement" on page 63. - - if there has been a material breach by Affymetrix or GMS Acquisition of any representation, warranty, covenant or agreement of Affymetrix or GMS Acquisition contained in the merger agreement that is not curable or, if curable, is not cured within 30 days after written notice of such breach is given by Genetic MicroSystems to the party committing such breach. In addition, Affymetrix may terminate the merger agreement if: - - the Genetic MicroSystems board of directors shall have withdrawn or adversely modified its approval or recommendation of the merger agreement or failed to reconfirm its recommendation of the merger agreement within five business days after a written request by Affymetrix to do so; - - there has been a material breach by Genetic MicroSystems of any representation, warranty, covenant or agreement of Genetic MicroSystems contained in the merger agreement that is not curable or, if curable, is not cured within 30 days after written notice of such breach is given by Affymetrix to Genetic MicroSystems; or - - Genetic MicroSystems or any of the other persons set forth under the heading "The Merger -- The Merger Agreement: No Solicitation of Acquisition Proposals" takes any of the actions that are proscribed by the covenant described under the that heading. See "The Merger -- The Merger Agreement: No 6 17 Solicitation of Acquisition Proposals" on page 59. TERMINATION FEE AND EXPENSE REIMBURSEMENT (PAGE 63) Genetic MicroSystems has agreed to pay to Affymetrix a termination fee equal to $2,500,000 and to reimburse Affymetrix' expenses up to $1,000,000 if the merger agreement is terminated under the following circumstances: - - Genetic MicroSystems terminates the merger agreement because: - Genetic MicroSystems is not in breach of any of the terms of the merger agreement; and - The board of directors of Genetic MicroSystems authorizes, subject to the terms of the merger agreement, Genetic MicroSystems to enter into a binding written agreement concerning a superior proposal, and Genetic MicroSystems notifies Affymetrix in writing that it intends to enter into such an agreement, attaching the most current version of such agreement to such notice; and - Affymetrix does not make, within five business days of receipt of Genetic MicroSystems' written notification of its intention to enter into such an agreement, an offer that the Genetic MicroSystems board of directors determines is at least as favorable, from a financial point of view, to the stockholders of Genetic MicroSystems as the proposal as to which Genetic MicroSystems gave notice. - - Affymetrix terminates the merger agreement because: - the Genetic MicroSystems board of directors, in connection with a superior proposal, has withdrawn or adversely modified its approval or recommendation of the merger agreement or failed to reconfirm its recommendation of the merger agreement within five business days after a written request by Affymetrix to do so; or - Genetic MicroSystems or any of the other persons delineated under the heading "The Merger -- The Merger Agreement: No Solicitation of Acquisition Proposals" takes any of the actions that are proscribed by the covenant described under that heading. See page 59 for additional information. APPOINTMENT OF STOCKHOLDER REPRESENTATIVE (PAGE 63) As provided by the terms of the Merger Agreement, each holder of shares of Genetic MicroSystems capital stock who votes in favor of the merger or who receives or accepts shares of Affymetrix common stock as the merger consideration will be deemed to have consented to the appointment of Jean Montagu as stockholder representative and will be deemed to have consented to the performance by the stockholder representative of all rights and obligations conferred on the stockholder representative under the merger agreement and the escrow agreement. For more detailed information on the escrow arrangements, see "Escrow Agreement" on page 68. INDEMNIFICATION AND LIABILITY OBLIGATIONS (PAGE 64) 10% of the aggregate number of shares of Affymetrix common stock to be delivered by Affymetrix at the closing of the merger will be deposited with an escrow agent, for a period not to exceed one year, for purposes of indemnifying Affymetrix. For more detailed information on the escrow arrangements, see "Escrow Agreement" on page 68. For a period of one year after the effective time of the merger, the stockholders of Genetic MicroSystems will jointly and severally indemnify and hold harmless Affymetrix and its affiliates for any 7 18 damages directly or indirectly arising or resulting from or in connection with: - - any breach of any representation or warranty made by Genetic MicroSystems, the stockholders of Genetic MicroSystems set forth on the signature pages of the merger agreement or the stockholder representative in the merger agreement or in any certificate delivered by Genetic MicroSystems pursuant to the merger agreement; - - any breach by Genetic MicroSystems of any covenant or obligation of Genetic MicroSystems in the merger agreement; or - - any breach of, or failure to assign to Affymetrix or any affiliate of Affymetrix all of the rights under and terms of, any contract to which Genetic MicroSystems is a party directly or indirectly arising or resulting from or in connection with Genetic MicroSystems' ceasing to exist by virtue of the merger. For a period of one year after the effective time of the merger, Affymetrix will indemnify and hold harmless the stockholders of Genetic MicroSystems, and shall pay to such stockholders the amount of any damages arising, directly or indirectly, from or in connection with: - - any breach of any representation or warranty made by Affymetrix in the merger agreement or in any certificate delivered by Affymetrix pursuant to the merger agreement; or - - any breach by Affymetrix of any covenant or obligation of Affymetrix in the merger agreement. Certain limitations on indemnification apply to Genetic MicroSystems' stockholders and to Affymetrix. The indemnification provisions of the merger agreement are not the exclusive remedy for Affymetrix. Affymetrix will have the right to recover damages from the Genetic MicroSystems' stockholders pursuant to a judgment from any court of competent jurisdiction for damages subject to certain limitations. STOCK OPTION AGREEMENT (PAGE 66) Affymetrix and Genetic MicroSystems have entered into a stock option agreement granting Affymetrix an option to purchase approximately 19.9% of Genetic MicroSystems' outstanding capital stock at $21.50 per share. The stock option is exercisable under the same circumstances under which the termination fee referred to in the previous section would be payable. The stock option agreement is attached as Appendix B to this document. If the stock option is exercised, Genetic MicroSystems may, under certain circumstances, repurchase all or any portion of the Genetic MicroSystems common stock issued pursuant to the stock option. Affymetrix' total profit allowed under the stock option agreement is $5 million. Affymetrix and Genetic MicroSystems believe that the exercisability of the stock option could prohibit any other acquiror of Genetic MicroSystems during the next two years from accounting for any such acquisition as a pooling-of-interests. In addition, Affymetrix would have a significant stake in Genetic MicroSystems if it exercised the stock option and held the stock. See "Stock Option Agreement -- Effect of Stock Option Agreement" on page 67 for a discussion of the effect of the stock option agreement. ESCROW AGREEMENT (PAGE 68) Pursuant to the terms of an escrow agreement, at the effective time, Affymetrix will deposit 10% of the aggregate number of shares of Affymetrix common stock to be delivered by Affymetrix at the closing of the merger, with Bank One Trust Company, NA, as escrow agent on a pro-rata per stockholder basis for a period not to exceed one year. These shares of Affymetrix common stock are for the purpose of satisfying the indemnification obligations owed to Affymetrix by the stockholder representative and the other stockholders of 8 19 Genetic MicroSystems. Shares that have not been used to satisfy claims will be: - - distributed by the escrow agent to the stockholders of Genetic MicroSystems pro rata in accordance with the relative ownership percentage of each stockholder. - - released five business days after the one-year anniversary of the effective date of the merger. The escrow agreement also provides that Affymetrix can instruct the escrow agent not to distribute the escrowed shares until any unsatisfied indemnification claim has been resolved. A copy of the escrow agreement is attached to this document as Appendix C. We encourage you to read the escrow agreement as it is the legal document that governs the disposition of the escrow fund. STOCKHOLDER VOTING AGREEMENTS (PAGE 69) Affymetrix has entered into stockholder voting agreements with Jean Montagu, the Chairman, Chief Executive Officer and founder of Genetic MicroSystems, and with five other stockholders of Genetic MicroSystems who are all either family members of Jean Montagu or executive officers or directors of Genetic MicroSystems. These six stockholders, who together beneficially own and have voting control over approximately 69.5% of the shares of Genetic MicroSystems common stock and approximately 72% of the shares of Genetic MicroSystems convertible preferred stock, have agreed to vote for adoption of the merger proposals and their shares represent more than the number of votes necessary to adopt the merger agreement and approve the merger. A form of the stockholder voting agreement is attached to this document as Appendix D. REGULATORY APPROVALS (PAGE 51) The Hart-Scott-Rodino Antitrust Improvements Act prohibits Affymetrix and Genetic MicroSystems from completing the merger until Affymetrix and Genetic MicroSystems have furnished certain information and materials to the Antitrust Division of the Department of Justice and the Federal Trade Commission and the required waiting period has ended. On October 6, 1999, Affymetrix and Genetic MicroSystems each filed the required notification and report forms. The required waiting period expires on November 5, 1999, unless extended. APPRAISAL RIGHTS (PAGE 43) Under Massachusetts law, Genetic MicroSystems stockholders who file written notice of their intention to exercise dissenters' rights before the taking of the vote and who do not vote to approve the merger agreement and otherwise comply with Sections 86 to 98 of the Massachusetts Business Corporation Law may elect to have the "fair value" of their shares judicially appraised in accordance with Massachusetts law and paid to them if the merger is completed. This amount may be more or less than the value of what these holders would otherwise receive in the merger. Genetic MicroSystems stockholders wishing to exercise appraisal rights must take the steps described in the section entitled "Appraisal Rights" and set forth in full in Appendix E. Failure to comply strictly with the statutory requirements may result in the loss of appraisal rights. MATERIAL FEDERAL INCOME TAX CONSEQUENCES (PAGE 49) The merger has been structured with the intent that you will not recognize gain or loss for federal income tax purposes on your receipt of Affymetrix common stock in exchange for your shares of Genetic MicroSystems stock. To review the tax consequences to stockholders in greater detail, see "The Merger -- Material Federal Income Tax Consequences" on page 49. ACCOUNTING TREATMENT (PAGE 51) Affymetrix and Genetic MicroSystems expect the merger to qualify as a pooling-of- 9 20 interests for accounting and financial reporting purposes, which means that Affymetrix and Genetic MicroSystems will be treated as if they had always been combined for accounting and financial reporting purposes. RISK FACTORS & CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS (PAGES 21 THROUGH 39) Both companies have made forward-looking statements in this document and, in the case of Affymetrix, in the documents that are incorporated by reference. Forward-looking statements are subject to risks and uncertainties. Forward-looking statements include information concerning possible or assumed future results of operations of Affymetrix, Genetic MicroSystems or the combined company. When words such as "believes," "expects," "anticipates" or similar expressions are used, we are making forward-looking statements. You should note that an investment in securities of Affymetrix involves risks and uncertainties. These risk factors should be considered by you in evaluating how to vote at the special meeting. Such risk factors include the following: - - Affymetrix common stock could experience fluctuations in price which could affect the value of the shares issued to Genetic MicroSystems stockholders; - - Affymetrix and Genetic MicroSystems may not be able to realize fully the cost savings and other benefits they expect to be realized in connection with the merger, which may adversely affect Affymetrix' earnings or financial condition; - - Affymetrix is in the early stages of development and commercialization of Affymetrix technology; - - Affymetrix has a history of operating losses, and expects to incur future losses and cannot be certain that it will become a profitable company; - - Affymetrix quarterly operating results may fluctuate significantly, and these fluctuations may cause Affymetrix' stock price to fall; - - Affymetrix currently has limited manufacturing capacity and continues to experience variability in manufacturing yields; - - circumstances beyond Affymetrix' control may result in manufacturing interruptions which could cause Affymetrix' business to suffer; - - Affymetrix has a limited history in manufacturing its products and Affymetrix may encounter problems as it increases its manufacturing efforts; - - Affymetrix quality control procedures may not be sufficient to ensure proper performance of its products; - - Affymetrix may have to rely on licenses from third parties for certain technology; - - Affymetrix' business may be harmed by significant outstanding litigation asserting that its products infringe third party intellectual property rights; - - Affymetrix' litigation against others generates significant counterclaims; - - Affymetrix' intellectual property is the subject of significant administrative actions; - - the markets in which Affymetrix competes are rapidly changing, and Affymetrix must develop and introduce new products and technologies to remain competitive; - - Affymetrix' business substantially depends upon the success of its products as an alternative to current technologies; - - the markets in which Affymetrix operates are highly competitive, and it may be unable to compete successfully against new entrants and established companies with greater resources; - - the loss of a key customer could adversely affect Affymetrix' revenues and be perceived as a loss of momentum in its business; 10 21 - - Affymetrix' efforts to increase its presence in markets outside of the United States may be unsuccessful and could result in losses; - - Affymetrix' existing products may not be commercially viable; - - if Affymetrix is unable to maintain its relationships with collaborative partners, Affymetrix may have difficulty selling our products and services; - - Affymetrix' failure to protect its intellectual property rights could adversely affect its ability to compete; - - Affymetrix depends on a limited number of suppliers, and Affymetrix may not be able to ship products on time if it is unable to obtain an adequate supply of manufacturing equipment, raw materials and product components on a timely basis; - - Affymetrix may need to raise additional capital that may not be available; - - Affymetrix may not be able to develop or access new technologies necessary to stay competitive; - - Affymetrix has limited sales, marketing and technical support experience, which may hurt its efforts at selling its products; - - changes in government funding of research institutions could adversely effect Affymetrix' business; - - Affymetrix' business may be threatened by serious ethical, legal and social implications of genetic testing; - - Affymetrix may not be able to recruit and retain the personnel it needs to succeed; - - Affymetrix may be exposed to liability due to product defects; - - Glaxo owns a substantial portion of Affymetrix' outstanding capital stock; - - Affymetrix has various mechanisms in place to discourage takeover attempts; - - Affymetrix is at risk of securities class action litigation due to stock price volatility; - - if Affymetrix' products or the products upon which it depends malfunction because of year 2000 problems, its business could be adversely affected; - - compliance with government regulation is critical to Affymetrix' business; - - Affymetrix' success depends on its ability to expand its sales and support organizations; - - substantial leverage and debt service obligations may adversely affect Affymetrix' cash flow; and - - Affymetrix depends on reimbursement by health care organizations. COMPARISON OF RIGHTS OF GENETIC MICROSYSTEMS STOCKHOLDERS AND AFFYMETRIX STOCKHOLDERS (PAGE 84) Genetic MicroSystems' charter and bylaws and Massachusetts law currently govern your rights as Genetic MicroSystems' stockholders. Affymetrix' charter and bylaws and Delaware corporate law will govern your rights as a stockholder of Affymetrix. Your rights as a Affymetrix stockholder will differ in some respects from your rights as a Genetic MicroSystems stockholder. 11 22 RECENT DEVELOPMENTS AFFYMETRIX On September 17, 1999, we announced the private placement of $125 million principal amount of 5% Convertible Subordinated Notes due 2006 and that the initial purchaser of the Notes has exercised its option and purchased an additional $25 million of Notes. The Notes are convertible, subject to adjustment in certain circumstances, into Affymetrix common stock at a price equal to $123.00 per share. Gross proceeds from the private placement, including exercise of the option, totaled $150 million. On September 10, 1999, the Board of Patent Appeals and Interferences of the United States Patent and Trademark Office, or USPTO, entered judgments in our favor in two interference proceedings relating to claims on two patents issued to Affymetrix. In both interference proceedings, the USPTO determined that Incyte/Synteni did not meet the burden of proof required to establish a case that the claims should be further evaluated in a full interference proceeding. Incyte/Synteni has indicated its interest to appeal this USPTO decision. On September 7, 1999, we announced the first commercial shipment of GeneChip probe arrays from our newest manufacturing facility in West Sacramento, California. Additional production equipment will be installed in our existing facility in Sunnyvale, California and plans are being developed to further expand the new West Sacramento facility in the remainder of 1999, 2000 and 2001. Our new facility will expand total production capacity and serve to mitigate risk associated with yield fluctuations as well as potential losses that may occur at our existing Sunnyvale production facility which sits in a seismically active location. On September 1, 1999, we introduced the GeneChip HuSNP(TM) Mapping Assay, an integrated solution for generating genotypes needed for genetic linkage mapping. 12 23 SUMMARY OF SELECTED HISTORICAL FINANCIAL INFORMATION OF AFFYMETRIX Affymetrix is providing the following information to aid you in your analysis of the financial aspects of the merger. Affymetrix derived this information from audited financial statements for 1994 through 1998 and unaudited financial statements for the six months ended June 30, 1998 and 1999. In the opinion of Affymetrix, this information reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations and financial condition for the six months ended June 30, 1998 and 1999. Results for interim periods should not be considered indicative of results for any other periods or for the year. This information is only a summary and you should read it in conjunction with Affymetrix' historical financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Affymetrix' annual reports, quarterly reports and other information on file with the Securities and Exchange Commission and incorporated by reference in this document. See "Where You Can Find More Information" on page 94.
SIX MONTHS ENDED FISCAL YEARS ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- ------------------- 1994 1995 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) HISTORICAL STATEMENT OF OPERATIONS DATA: Total revenue................ $ 1,574 $ 4,625 $ 11,972 $ 19,765 $ 52,025 $ 20,823 $ 39,514 Loss from operations......... (10,212) (11,628) (16,537) (27,659) (28,549) (14,197) (15,571) Net loss..................... (9,680) (10,747) (12,227) (22,526) (23,130) (11,826) (13,243) Preferred stock dividends.... - - - - (2,321) (695) (1,626) Net loss attributable to common stockholders........ (9,680) (10,747) (12,227) (22,526) (25,451) (12,512) (14,869) Basic and diluted net loss per common share........... $ (0.55) $ (0.61) $ (0.61) $ (0.99) $ (1.11) $ (0.55) $ (0.63) Shares used in computing basic and diluted net loss per common share........... 17,563 17,664 20,131 22,644 22,915 22,859 23,744
AS OF DECEMBER 31, AS OF ---------------------------------------------------- JUNE 30, 1994 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- -------- (IN THOUSANDS) HISTORICAL BALANCE SHEET DATA: Cash, cash equivalents and short-term investments............................ $ 17,805 $ 38,883 $108,982 $ 71,573 $ 80,568 $89,261 Working capital.......................... 15,677 36,070 107,668 71,553 80,387 95,076 Total assets............................. 19,945 44,594 118,900 101,170 136,428 158,185 Long-term liabilities, net of current portion(1)............................. 7,135 948 741 513 5,261 5,135 Convertible redeemable preferred stock(2)............................... - - - - 49,857 49,857 Total stockholders' equity............... 9,254 38,561 112,533 91,036 66,750 85,113
- ------------------------- (1) Excludes $150 million of 5% Convertible Subordinated Notes due 2006, issued by Affymetrix in September 1999. (2) Convertible redeemable preferred stock was converted into 1,257,229 shares of common stock in August 1999. 13 24 SUMMARY OF SELECTED HISTORICAL FINANCIAL INFORMATION OF GENETIC MICROSYSTEMS Genetic MicroSystems is providing the following information to aid you in your analysis of the financial aspects of the merger. Genetic MicroSystems derived this information from audited financial statements for the year ended December 31, 1998 and for the period from August 7, 1997 (date of inception) to December 31, 1997 and unaudited financial statements for the six months ended June 30, 1998 and July 3, 1999. In the opinion of Genetic MicroSystems, this information reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations and financial condition for the six months ended June 30, 1998 and July 3, 1999. Results for interim periods should not be considered indicative of results for any other periods or for the year. This information is only a summary and you should read it in conjunction with Genetic MicroSystems' historical financial statements and related notes included elsewhere in this document. See Appendix F to this document.
PERIOD FROM AUGUST 7, 1997 (DATE OF SIX MONTHS ENDED INCEPTION) TO YEAR ENDED ------------------- DECEMBER 31, DECEMBER 31, JUNE 30, JULY 3, 1997 1998 1998 1999(1) -------------- ------------ -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) HISTORICAL STATEMENT OF OPERATIONS DATA: Revenue..................................... $ -- $ 388 $ -- $5,082 Loss from operations........................ (481) (4,337) (1,776) (1,437) Net loss.................................... (254) (3,670) (1,614) (1,371) Basic and diluted net loss per share........ $(25.38) $ (6.21) $(10.35) $(1.36) Shares used in computing basic and diluted net loss per share........................ 10 591 155 1,009
AS OF DECEMBER 31, AS OF ---------------- JULY 3, 1997 1998 1999 ------ ------ ------- (IN THOUSANDS) HISTORICAL BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $1,552 $4,365 $ 2,527 Working capital............................................. 718 4,544 3,744 Total assets................................................ 1,658 5,758 6,393 Long-term liabilities....................................... -- 3,050 3,038 Convertible redeemable preferred stock...................... -- 2,951 3,672 Total shareholders' equity.................................. 812 (786) (2,169)
- --------------- (1) Effective January 1, 1999, for quarterly interim periods, Genetic MicroSystems adopted a fiscal quarter ending on the Saturday nearest the end of the calendar quarter. 14 25 PRO FORMA COMBINED FINANCIAL INFORMATION OF AFFYMETRIX The following describes the pro forma effect of the merger on - Affymetrix' unaudited statement of operations for the six months ended June 30, 1998 and 1999 and the years ended December 31, 1997 and 1998; and - its unaudited balance sheet as of June 30, 1999, based on the historical financial statements of Affymetrix and Genetic MicroSystems. For purposes of the pro forma combined financial information, Genetic MicroSystems' results of operations for the six month period ended July 3, 1999 have been combined with Affymetrix' results of operations for the six month period ended June 30, 1999. The unaudited pro forma combined financial information and the accompanying notes should be read in conjunction with the historical financial information and related notes of Affymetrix, incorporated by reference in this document, and of Genetic MicroSystems included elsewhere in this document. The unaudited pro forma combined financial information is provided for informational purposes only and does not purport to represent what Affymetrix' financial position and results of operations would actually have been had the merger and other pro forma adjustments in fact occurred at the dates indicated. The unaudited pro forma combined statement of operations data and combined balance sheet data of Affymetrix illustrate the estimated effects of the merger as if that transaction had occurred at the beginning of the periods presented and end of the periods presented, respectively. Management of Affymetrix and Genetic MicroSystems intend to receive a letter, as a condition to closing, from their respective independent auditors regarding the appropriateness of pooling-of-interests accounting for the merger if closed and consummated in accordance with the merger agreement. Under this method of accounting, the recorded historical cost basis of the assets and liabilities of Affymetrix and Genetic MicroSystems will be carried forward to the operations of the combined company at their historical recorded amounts. Results of operations of the combined company will include the results of operations of Affymetrix and Genetic MicroSystems for the entire fiscal period in which the combination occurs, and the historical results of operations of the separate companies for fiscal years prior to the merger will be combined and reported as the results of operations of the combined company. No adjustments have been made to the unaudited condensed pro forma financial statement data of Affymetrix and Genetic MicroSystems to conform the accounting policies of the combined company as the nature and amounts of such adjustments are not expected to be significant. Some of the conditions to be met for pooling-of-interests accounting cannot be fully assessed until the passage of specified periods of time after the effective time of the merger, as certain of the conditions for pooling-of-interests accounting address transactions occurring within these specified periods of time. Certain events, including certain transactions in Affymetrix or Genetic MicroSystems common stock by affiliates of Affymetrix and Genetic MicroSystems, respectively, could prevent the merger from qualifying as a pooling-of-interests for accounting purposes. Because Genetic MicroSystems is not considered a "significant subsidiary" of Affymetrix for purposes of the Securities and Exchange Commission's accounting rules, unaudited pro forma combined financial statements that give effect to the merger using the pooling-of-interests accounting method are not presented in this document. 15 26 UNAUDITED SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, -------------------- -------------------- 1997 1998 1998 1999 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS DATA: Total revenue.............................. $ 19,765 $ 52,413 $ 20,823 $ 44,596 Loss from operations....................... (28,140) (32,886) (15,973) 17,008 Net loss................................... (22,780) (26,800) (13,440) (14,615) Preferred Stock dividends.................. -- (2,321) (695) (1,626) Net loss attributable to common stockholders............................. (22,780) (29,121) (14,135) (16,242) Basic and diluted net loss per common share.................................... $ (1.01) $ (1.23) $ (0.61) $ (0.66) Shares used in computing basic and diluted net loss per common share................ 22,647 23,636 23,106 24,725
JUNE 30, 1999 -------------------------------------------------------- GENETIC AFFYMETRIX MICROSYSTEMS ADJUSTMENTS COMBINED ---------- ------------ ----------- -------- (IN THOUSANDS) PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments............................ $ 89,261 $ 2,527 $ -- $ 91,788 Working capital.......................... 95,076 3,744 (2,500) (A) 96,320 Total assets............................. 158,185 6,393 -- 64,578 Long-term liabilities, net of current portion................................ 5,135 3,038 -- (B) 8,173 Convertible redeemable preferred stock... 49,857 3,672 (3,672) (C) 49,857 Stockholders' equity (deficit)........... 85,113 (2,169) (2,500) (A) 80,444
- ------------------------- (A) Affymetrix and Genetic MicroSystems estimate they will incur direct transaction costs of approximately $2.5 million associated with the merger for professional fees, financial printing and other related charges. These transaction costs will be charged to operations in the quarter in which the transaction closes. The pro forma condensed combined balance sheet gives effect to these costs as if they had been incurred as of June 30, 1999. The costs are not included in the pro forma condensed combined statement of operations data as they are nonrecurring. Affymetrix expects to incur additional costs which have not yet been determined following the consummation of the merger associated with integrating the two companies, which costs will be expensed as incurred. (B) Excludes $150 million of 5% Convertible Subordinated Notes due 2006, issued by Affymetrix in September 1999. (C) The convertible redeemable preferred stock of Genetic MicroSystems will be exchanged for shares of Affymetrix common stock upon the consummation of the merger at the exchange ratio specified in this document. 16 27 COMPARATIVE PER SHARE INFORMATION The following table summarizes certain historical financial information and unaudited pro forma combined and equivalent pro forma financial information on a per share basis. The unaudited pro forma combined financial information assumes that the merger was completed at the beginning of each of the periods presented and gives effect to the merger as a pooling-of-interests for accounting purposes. The basic and diluted unaudited pro forma combined per share information for Affymetrix is based upon the number of outstanding Affymetrix common stock adjusted to include the number of Affymetrix common shares that would be issued in the merger based on the number of shares of Genetic MicroSystems common and preferred stock outstanding on the dates reported. Historical book value per share is computed by dividing stockholders' equity (deficit) by the number of shares of common stock outstanding at the end of the period. Affymetrix pro forma combined book value per share is computed by dividing pro forma combined stockholders' equity by the pro forma number of shares of Affymetrix common stock outstanding at the end of the period. The unaudited equivalent pro forma per share information for Genetic MicroSystems is based on the unaudited pro forma combined amounts per share for Affymetrix multiplied by the exchange ratio of 0.2832. The information set forth on the next page is qualified in its entirety by reference to, and should be read in conjunction with, the historical financial information of Affymetrix incorporated by reference and Genetic MicroSystems included in this document and the pro forma combined financial information included in this document. 17 28
SIX MONTHS YEARS ENDED DECEMBER 31, ENDED -------------------------- JUNE 30, 1996 1997 1998 1999 ------ ------ ------ ---------- HISTORICAL -- AFFYMETRIX: Basic and diluted net loss per common share..... $(0.61) $(0.99) $(1.11) $(0.63) Book value per common share..................... $ 3.51 Pro forma book value per common share assuming conversion of convertible redeemable preferred stock in August 1999.......................... $ 5.29
PERIOD FROM AUGUST 7, 1997 (DATE OF SIX MONTHS INCEPTION) TO YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, JULY 3, 1997 1998 1999 -------------- ------------ ---------- HISTORICAL -- GENETIC MICROSYSTEMS: Basic and diluted net loss per share............ $(25.38) $(6.21) $(1.36) Book value per common share..................... $(2.15)
YEARS ENDED SIX MONTHS DECEMBER 31, ENDED ---------------- JUNE 30, 1997 1998 1999 ------ ------ ---------- AFFYMETRIX PRO FORMA COMBINED: Basic and diluted net loss per common share............... $(1.01) $(1.23) $(0.66) Book value per common share............................... $ 3.19 Pro forma combined book value per common share assuming conversion of Affymetrix convertible redeemable preferred stock into common stock in August 1999........ $ 4.92 GENETIC MICROSYSTEMS EQUIVALENT PRO FORMA COMBINED: Basic and diluted net loss per common share............... $(0.29) $(0.35) $(0.19) Book value per common share............................... $ 0.90 Equivalent pro forma combined book value per common share assuming conversion of Affymetrix convertible preferred stock into common stock in August 1999.................. $ 1.39
18 29 MARKET PRICE AND DIVIDEND INFORMATION Affymetrix common stock has traded on the NASDAQ National Market under the symbol "AFFX" since Affymetrix' initial public offering on June 6, 1996. There is no established trading market for any Genetic MicroSystems securities. The following table sets forth, for the calendar quarters indicated, the high and low closing prices per share of Affymetrix common stock as quoted on the NASDAQ National Market.
AFFYMETRIX COMMON STOCK ---------------- CALENDAR QUARTER HIGH LOW ---------------- ------ ------ 1996 Second Quarter (commencing June 6, 1996)............ $17.38 $14.50 Third Quarter....................................... 17.88 11.25 Fourth Quarter...................................... 22.25 16.25 1997 First Quarter....................................... 36.38 19.75 Second Quarter...................................... 35.25 20.38 Third Quarter....................................... 46.75 29.13 Fourth Quarter...................................... 45.00 29.75 1998 First Quarter....................................... 35.13 24.63 Second Quarter...................................... 34.13 21.13 Third Quarter....................................... 29.31 16.13 Fourth Quarter...................................... 28.38 19.50 1999 First Quarter....................................... 41.50 23.75 Second Quarter...................................... 50.25 32.50 Third Quarter....................................... 127.00 48.00 Fourth Quarter (through October 13)................. 108.00 92.00
RECENT CLOSING PRICES The following table sets forth the closing sales price per share of Affymetrix common stock on the NASDAQ National Market on September 10, 1999, the last trading day before public announcement of the merger, and on October 13, 1999, the last practicable trading day prior to the date of this document. Since there has been no public market for Genetic MicroSystems securities, there is no information as to the market value of shares of Genetic MicroSystems common or convertible preferred stock.
AFFYMETRIX COMMON STOCK ------------ September 10, 1999........................................ $101.13 October 13, 1999.......................................... $102.13
19 30 The market price of Affymetrix common stock is likely to fluctuate prior to the merger. You should obtain current market quotations for Affymetrix common stock. The future prices or markets for Affymetrix common stock cannot be predicted. DIVIDEND INFORMATION No cash dividends have ever been paid or declared on the shares of Affymetrix common stock or on the shares of Genetic MicroSystems common or convertible preferred stock. Affymetrix does not anticipate paying cash dividends on its common stock for the foreseeable future. Affymetrix' present intention is to retain its earnings, if any, for the future operation and expansion of its business. Any future payment of dividends on Affymetrix common stock will be at the discretion of the board of directors of Affymetrix and will depend upon, among other things, Affymetrix' earnings, financial condition, capital requirements, level of indebtedness and other factors that the Affymetrix board of directors deems relevant. NUMBER OF STOCKHOLDERS AND NUMBER OF SHARES OUTSTANDING As of October 12, 1999, there were approximately 394 stockholders of Affymetrix of record who held an aggregate of approximately 25,759,524 shares of Affymetrix common stock. As of October 13, 1999, there were 88 stockholders of Genetic MicroSystems of record who held an aggregate of approximately 1,006,702 shares of Genetic MicroSystems common stock and approximately 2,431,977 shares of Genetic MicroSystems convertible preferred stock. 20 31 RISK FACTORS You should consider the following risk factors in determining how to vote at the special meeting and in connection with ownership of Affymetrix common stock. AFFYMETRIX COMMON STOCK COULD EXPERIENCE FLUCTUATIONS IN PRICE WHICH COULD AFFECT THE VALUE OF THE SHARES ISSUED TO GENETIC MICROSYSTEMS STOCKHOLDERS. Recently, the stock market and the trading price for Affymetrix common stock have experienced significant price fluctuations. Market fluctuations may adversely affect the market price of Affymetrix common stock. This volatility has been caused and will in the future continue to be caused by, among other things, the following factors, some of which are beyond Affymetrix' control: - - Quarterly variations in Affymetrix' operating results; - - Announcements of new commercial products and initiatives either by Affymetrix or its collaborative partners or competitors; - - Developments in litigation initiated against Affymetrix or by Affymetrix; and - - Developments concerning proprietary rights; - - Technological innovations by Affymetrix and its competitors; - - New collaborative agreements; - - Announcements of Affymetrix' results of research activities; - - Changes in patent laws; - - Changes in government regulation or new regulatory actions; - - Fluctuations in the stock market price and volume of traded shares generally, especially fluctuations in the traditionally volatile technology and biotechnology sectors. The value of Affymetrix common stock at the time of the special meeting of Genetic MicroSystems stockholders, the date on which the merger is completed, the date the Genetic MicroSystems stockholders receive shares of Affymetrix common stock or the date stockholders eventually sell their Affymetrix common stock may be significantly different from the price of Affymetrix common stock today. AFFYMETRIX AND GENETIC MICROSYSTEMS MAY NOT BE ABLE TO REALIZE FULLY THE COST SAVINGS AND OTHER BENEFITS THEY EXPECT TO BE REALIZED IN CONNECTION WITH THE MERGER, WHICH MAY ADVERSELY AFFECT AFFYMETRIX' EARNINGS OR FINANCIAL CONDITION. Affymetrix and Genetic MicroSystems expect certain business synergies and cost savings including product complementarity and instrument manufacturing capabilities to result from the merger. The merger, however, involves the integration of two companies that have previously operated independently of each other and the successful combination of the two enterprises may result in a diversion of management attention for an extended period of time. Further, the parties may not be able to achieve any enhanced cost savings, selling opportunities, development and marketing of product offerings, and/or manufacturing synergies. Inability to realize the full extent of, or any of, the anticipated benefits of the merger, as well as delays encountered in the integration process, could have an adverse effect upon the revenues, level of expenses, operating results and financial condition of Affymetrix, which may affect the value of the Affymetrix common stock. AFFYMETRIX IS IN THE EARLY STAGES OF DEVELOPMENT AND COMMERCIALIZATION OF AFFYMETRIX TECHNOLOGY. For the most part, Affymetrix' technologies are still in the early stages of development and Affymetrix has just begun to incorporate its technologies into commercialized products. Affymetrix' GeneChip system has thus far been sold solely for research use, and the majority of these sales have been for Affymetrix' expression-monitoring application. In order to further develop and commercialize the expression-monitoring, genotyping and disease management 21 32 applications of Affymetrix' GeneChip system and other potential products, including those of Genetic MicroSystems, Affymetrix will need to make significant additional investments, including funding manufacturing scale-up, efforts in bioinformatics, new product, software and instrument design, and quality testing to ensure Affymetrix' products perform correctly and are cost-effective. In addition, while Affymetrix' initial research product sales have either not required regulatory approval or have been regulated only as analyte-specific reagents, Affymetrix expects that Affymetrix and its collaborators will need to obtain additional regulatory approvals in the future. Obtaining such approvals could be costly and time-consuming and Affymetrix cannot be sure it will be able to obtain all necessary approvals. Even if Affymetrix develops its products for commercial use and obtains all necessary regulatory approval, it may not be able to develop products that: - - are accepted by the research, diagnostic or other marketplaces; - - are accurate and effective; - - meet applicable regulatory standards in a timely manner; - - are protected from competition by others; - - do not infringe the intellectual proprietary rights of others; - - can be manufactured in sufficient quantities or at a reasonable cost; or - - can be marketed successfully. Any failure to develop these products could have a material adverse effect on Affymetrix' business, financial condition and results of operations. AFFYMETRIX HAS A HISTORY OF OPERATING LOSSES, AND EXPECTS TO INCUR FUTURE LOSSES AND CANNOT BE CERTAIN THAT IT WILL BECOME A PROFITABLE COMPANY. Affymetrix has experienced significant operating losses each year since its inception and expects these losses to continue. For example, Affymetrix experienced net losses of approximately $12.2 million in 1996, $22.5 million in 1997 and $23.1 million in 1998 and approximately $13.2 million for the six months ended June 30, 1999. Affymetrix had an accumulated deficit of approximately $92.7 million as of December 31, 1998, and approximately $107.6 million as of June 30, 1999. Affymetrix' losses have resulted principally from costs incurred in research and development and from sales and marketing and other general and administrative costs associated with its operations. These costs have exceeded Affymetrix' revenues and interest income, which, to date, have been generated principally from product sales and technology access fees, collaborative research and development agreements, government research grants and from cash and investment balances. Affymetrix expects to incur substantial additional operating losses as a result of increases in expenses for manufacturing, marketing and sales capabilities, research and product development and general and administrative costs. Affymetrix may never achieve profitability. Among other things, Affymetrix' ability to manage the transition to a commercially successful company will depend upon its ability to: - - develop products that are accepted by the marketplace; - - create a product mix that is appealing to pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories; - - enter into supply agreements with customers desiring to use Affymetrix' products; - - establish and scale up its commercial manufacturing capability for probe arrays and consistently achieve acceptable yields from those facilities; - - cost-effectively manufacture components of the GeneChip system; - - avoid infringing on the intellectual property rights of others; - - enforce Affymetrix' intellectual property rights against others; 22 33 - - establish sales and distribution capabilities cost-effectively; - - develop its marketing capabilities cost-effectively; - - obtain necessary regulatory approvals; and - - hire and retain qualified key personnel. In addition, any delays in receipt of any necessary regulatory approvals, delays in shipment of products from suppliers or any adverse developments with respect to Affymetrix' ability to enforce its intellectual property relative to its competitors could seriously harm the successful commercialization of Affymetrix' technologies and could have a material adverse effect on Affymetrix' business, financial condition and results of operations. AFFYMETRIX' QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND THESE FLUCTUATIONS MAY CAUSE AFFYMETRIX' STOCK PRICE TO FALL. Affymetrix' quarterly operating results depend upon: - - the volume and timing of orders for GeneChip products; - - the timing of probe array, instrument and software shipments and installations; - - Affymetrix' manufacturing capabilities; - - variations in product yields and gross margins; - - variations in revenue recognized under Affymetrix' supply and collaborative agreements, including license fees, product sales, design fees, milestones, royalties and other contract revenues; - - Affymetrix' mix of products sold; - - the timing of new product introductions by Affymetrix; and - - variations in expenses incurred in connection with the operations of Affymetrix' business, including legal fees, manufacturing facility start-up costs and capital expenditures. Affymetrix' quarterly operating results may also fluctuate significantly depending on factors out of our control, including: - - the introduction of new products by Affymetrix' competitors; - - the cost and availability of licenses to third party intellectual property associated with Affymetrix' products; - - market acceptance of the GeneChip system and other potential products; - - the cost, quality and availability of reagents and components required to manufacture or use Affymetrix' products; - - changes in commercial and government funding of research using Affymetrix' products; and - - regulatory actions; - - third-party reimbursement policies. Because Affymetrix' revenues and operating results are volatile and difficult to predict, Affymetrix believes that period-to-period comparisons of Affymetrix' results of operations are not a good indication of Affymetrix' future performance. It is likely that in some future quarter or quarters, Affymetrix' operating results will be below the expectations of public market analysts or investors. In such event, the market price of Affymetrix common stock may fall significantly. AFFYMETRIX CURRENTLY HAS LIMITED MANUFACTURING CAPACITY AND CONTINUES TO EXPERIENCE SIGNIFICANT VARIABILITY IN MANUFACTURING YIELDS. Affymetrix is currently manufacturing limited quantities of probe arrays for internal and collaborative purposes and for sale to the research market. Affymetrix currently has two manufacturing facilities, one located in Sunnyvale, California and the other in West Sacramento, California. The actual number of probe arrays Affymetrix is able to sell or use depends on the utilization of the capacity at these facilities, the yield of probe arrays that pass quality control testing and the number of probe arrays manufactured on each wafer. Further- 23 34 more, portions of Affymetrix' production capacity are limited to certain types of probe arrays. Affymetrix has experienced and continues to experience significant variability in the manufacturing yield of its GeneChip products which has adversely impacted, and is expected to continue to adversely impact, its gross margins and business. Affymetrix has also experienced, and anticipates that it will continue to experience, difficulties in meeting anticipated customer, collaborator and internal demand for certain of its probe array products. Affymetrix' inability to deliver products in a timely manner could seriously harm its relationship with its customers, delay introduction of new products and have a material adverse effect on Affymetrix' business, financial condition and results of operations. CIRCUMSTANCES BEYOND AFFYMETRIX' CONTROL MAY RESULT IN MANUFACTURING INTERRUPTIONS WHICH COULD CAUSE ITS BUSINESS TO SUFFER. Affymetrix' manufacturing equipment requires significant capital investment. Affymetrix presently relies on two manufacturing facilities for our probe arrays. These manufacturing facilities are subject to circumstances beyond its control such as fires, earthquakes, floods, power failures, unauthorized intrusions into our facilities and similar events. Earthquakes are of particular significance since the Sunnyvale, California manufacturing facility is located in an earthquake-prone area. Although Affymetrix has built a second manufacturing facility in West Sacramento, California, which Affymetrix expects will mitigate earthquake risks when it becomes fully operational and capacity is increased at that facility, in the event that Affymetrix' existing manufacturing facilities are affected by circumstances beyond its control, Affymetrix could be unable to manufacture products for sale or its capacity could be significantly decreased until the facilities are replaced or restored to operation. If manufacturing operations were curtailed or ceased, such curtailment or cessation would have a material adverse effect on Affymetrix' business, financial condition and results of operations. AFFYMETRIX HAS A LIMITED HISTORY IN MANUFACTURING ITS PRODUCTS, AND IT MAY ENCOUNTER PROBLEMS AS IT INCREASES ITS MANUFACTURING EFFORTS. There are certain aspects of Affymetrix' manufacturing processes that are not fully understood and that may not be readily scalable to allow for production of probe arrays in larger volumes. As a result, manufacturing and quality control problems have arisen and are expected to continue to arise as Affymetrix attempts to scale-up its manufacturing facilities. Affymetrix may not be able to scale-up these facilities in a timely and cost-effective manner or at commercially reasonable cost. If Affymetrix is unable to consistently manufacture probe arrays on a timely basis because of these or other factors, its business, financial condition and results of operations could be materially and adversely affected. AFFYMETRIX QUALITY CONTROL PROCEDURES MAY NOT BE SUFFICIENT TO ENSURE PROPER PERFORMANCE OF ITS PRODUCTS. The GeneChip system is a complex set of products, which are produced in an innovative and complicated manufacturing process. As part of this manufacturing process, Affymetrix tests only selected probe arrays from each wafer and only selected probes on these probe arrays against a number of performance criteria. Affymetrix therefore relies on limited internal quality control procedures to verify the correct completion of the manufacturing process. In addition, Affymetrix and its customers rely on the accuracy of genetic sequence information contained in databases upon which its products are based. It is therefore possible that probe arrays that do not meet all of Affymetrix' performance specifications may not be identified before they are shipped. Further, after the probe arrays are shipped, a customer may test only selected probes. Due to the complexity and limited operating history of these products, Affymetrix has experienced technical problems and anticipates that additional technical problems will occur and be discovered as more GeneChip systems are placed into operation. If Affymetrix is unable to deliver products consist- 24 35 ently to its customers that meet their performance expectations, demand for Affymetrix' products will decline and its business, financial condition and results of operations will be materially and adversely affected. AFFYMETRIX MAY HAVE TO RELY ON LICENSES FROM THIRD PARTIES FOR CERTAIN TECHNOLOGY. Affymetrix' commercial success also depends in part on it neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to its technologies and products. For example, Affymetrix or its collaborators and customers may need to acquire a license for an amplification technology to use the GeneChip system in certain applications. Such license may not be available on commercially reasonable terms. Furthermore, Affymetrix is aware of third-party patents that may relate to its technology. In addition, Affymetrix has received and may in the future receive notices claiming that it infringes third party rights as well as invitations to take licenses under third party patents. Affymetrix cannot guarantee that it will not be determined to infringe on patents or proprietary rights of third parties or that Affymetrix, its collaborative partners or its customers would be able to obtain a license to such patents or proprietary rights on commercially acceptable terms, if at all. Affymetrix is aware of U.S. and European Union patents and patent applications owned by Oxford Gene Technology that have issued or that are pending and may issue that may relate to Affymetrix' technology. Affymetrix has opposed two such allowed European Union patents. Several of the applications have broad claims to certain array related technologies. In August 1998, Affymetrix entered into a series of agreements with Beckman Coulter designed to provide Affymetrix with a path to obtain a license to these patents and patent applications. On June 4, 1999, Oxford Gene Technology filed patent infringement suits against Affymetrix in the U.S. and in the United Kingdom asserting that Oxford Gene Technology is not obligated to grant Affymetrix a license under a consortium clause in Oxford Gene Technology's 1996 license agreement with Beckman Coulter. On June 5, 1999, pursuant to the series of agreements Affymetrix entered with Beckman Coulter, the license agreement between Beckman Coulter and Oxford Gene Technology was assigned to Affymetrix. This series of agreements and their interpretation may be challenged and, if interpreted adversely, Affymetrix could be subject to an injunction or damages that could delay or preclude sales of some or all of its products. Any such delay or constraint would have a material adverse effect on Affymetrix' business, financial condition and results of operations. Affymetrix has various option, supply and license agreements with third parties that give it rights to use certain technologies. If Affymetrix fails to maintain rights to these types of technology this failure could have a material adverse effect on its business, financial condition and results of operations. For example, Affymetrix' inability to exercise an option for University of California technology relating to miniaturized polymerase chain reaction devices or other option agreements under reasonable terms, or at all, could seriously harm its ability to sell integrated device products. AFFYMETRIX' BUSINESS MAY BE HARMED BY SIGNIFICANT OUTSTANDING LITIGATION ASSERTING THAT ITS PRODUCTS INFRINGE THIRD PARTY INTELLECTUAL PROPERTY RIGHTS. Affymetrix is a party to significant litigation, which will consume substantial financial and managerial resources and which could adversely affect its business, financial condition and results of operations. Further, because of the substantial amount of discovery required in connection with any such litigation, there is a risk that confidential information could be compromised by disclosure. On March 3, 1997, Hyseq filed a lawsuit in United States District Court for the Northern District of California (San Jose Division) alleging that Affymetrix' products infringe United States Patents 5,202,231 and 5,525,464. In addition, in December 1997, Hyseq filed a second action claiming that Affymetrix' products infringe a related patent, United States 25 36 Patent 5,695,940. On August 18, 1998, Affymetrix filed a lawsuit in Federal District Court in the Northern District of California (San Francisco Division) against Hyseq alleging infringement of U.S. Patent Nos. 5,795,716 and 5,744,305, or '305. On September 1, 1998, Affymetrix added its U.S. Patent No. 5,800,992, or '992, to the complaint of infringement against Hyseq. On June 4, 1999, Oxford Gene Technology filed suit against Affymetrix in the United States District Court for the District of Delaware and in the United Kingdom alleging infringement of United States Patent 5,700,637 and European Patent 0-373-203, respectively. On June 5, 1999, an asset transfer agreement with Beckman Coulter became effective, giving Affymetrix access to various assets, including licenses to United States Patent 5,700,637 and European Patent 0-373-203. On June 17, 1999, Affymetrix filed a complaint in the United States District Court for the Northern District of California asking for, among other things, a declaration that Affymetrix has a valid license to use the patents and that, in light of this license, Affymetrix is not infringing on these patents. The Hyseq and the Oxford Gene Technology actions seek damages based on the sale of Affymetrix' products and processes and seek to enjoin commercial activities relating to those products and processes. In addition to subjecting Affymetrix to potential liability for damages, these actions, and any other similar legal actions against Affymetrix or its collaborative partners, could require Affymetrix or its collaborative partners to obtain a license in order to continue to manufacture, market or use the affected products and processes. While Affymetrix believes that the Hyseq and Oxford Gene Technology complaints are without merit, Affymetrix may not prevail in the these actions and Affymetrix or its collaborative partners may not prevail in any other related action. Moreover, in the event Affymetrix does not prevail in the Hyseq and Oxford Gene Technology actions and Affymetrix, its partners or its customers are required to obtain a license to continue to manufacture, market or use the affected products and processes, Affymetrix, its partners or its customers may not be able to obtain such a license on commercially acceptable terms, if at all. Furthermore, Affymetrix has expended and is likely to continue to expend substantial financial and managerial resources in defending against the claims filed by Hyseq and Oxford Gene Technology. AFFYMETRIX' INTELLECTUAL PROPERTY IS THE SUBJECT OF SIGNIFICANT LITIGATION. On January 6, 1998, Affymetrix filed a patent infringement action in the United States District Court for the District of Delaware (No. 98-6) alleging that certain of Incyte's and Synteni's products infringe United States Patent 5,445,934, or '934. On September 1, 1998, Affymetrix filed a complaint against Incyte and Synteni in Federal District Court in Delaware alleging infringement of the '305 Patent and the '992 Patent. These actions were transferred to the United States District Court for the Northern District of California on November 18, 1998, as case numbers C98-4507 and C98-4508, respectively. The actions seek to enjoin commercial activities of Incyte and Synteni relating to Affymetrix' patents and, in regard to the '992 Patent, sought a preliminary injunction. Incyte and Synteni moved for summary judgment that certain claims of the '992 Patent were invalid. On May 4, 1999, the Court denied Affymetrix' motion for preliminary injunction and denied Incyte/Synteni's motion for summary judgment. Affymetrix may not prevail in asserting its patent rights against Hyseq, Incyte, Synteni or others. Affymetrix has expended and is likely to continue to expend substantial financial and managerial resources in asserting its patent rights against Hyseq, Incyte, Synteni and others. Affymetrix' failure to successfully enforce its patent rights or the loss of these patent rights or others would remove a legal obstacle to competitors in designing probe array systems with similar competitive advantages to Affymetrix' GeneChip technology. The removal of such barriers could have a material adverse effect on Affymetrix' business, financial condition and results of operations. 26 37 AFFYMETRIX' LITIGATION AGAINST OTHERS GENERATES SIGNIFICANT COUNTERCLAIMS. On April 17, 1998, Incyte filed a response and counterclaim to case number C98-4507, asserting that the '934 Patent is invalid and not infringed. On April 17, 1998, Incyte also filed a counterclaim alleging that a patent license agreement Affymetrix entered into in December 1997 with Molecular Dynamics interfered with an agreement between Incyte and Molecular Dynamics. In the counterclaim, Incyte alleges that the terms of Affymetrix' patent license to Molecular Dynamics prevented Molecular Dynamics from meeting its obligations to Incyte. Incyte seeks damages from Affymetrix. On September 21, 1998, Incyte and Synteni filed an answer asserting various defenses to the lawsuits in relation to the '992 Patent and the '305 Patent, and asserted several counterclaims, including: - - a request for declaration of non-infringement and invalidity; - - an assertion of unfair competition; - - a request for a declaration that Synteni and Dari Shalon (a one-time employee of Synteni) have not misappropriated any of Affymetrix' trade secrets; - - a claim of tortious interference with Incyte's and Synteni's economic advantage; - - a claim of slander of title of a patent and a claim of trade libel. Affymetrix believes that the counterclaims are without merit. However, Affymetrix has expended and is likely to continue to expend significant financial and managerial resources defending against these and any other counterclaims filed by Incyte and Synteni and others. Affymetrix' failure to successfully enforce its patent rights or defend against counterclaims of Incyte, Synteni, or others could result in a material adverse effect on Affymetrix' business, financial condition and results of operations. AFFYMETRIX' INTELLECTUAL PROPERTY IS THE SUBJECT OF SIGNIFICANT ADMINISTRATIVE ACTIONS. The United States Patent and Trademark Office, or USPTO, notified Affymetrix that Stanford University presented claims that relate to substantially the same subject matter as certain claims from the '992 Patent and all of the claims of the '305 Patent. The Stanford application is alleged to be exclusively licensed to Incyte. The USPTO notified Affymetrix on April 2, 1999 that it had declared an interference proceeding relating to these patents and claims of patents. The USPTO conducted proceedings to determine the priority of these claims and determined that Incyte/Synteni did not meet the burden of proof required to establish a case that the claims should be further evaluated in a full interference proceeding. Incyte/Synteni has indicated that it will appeal this decision. Affymetrix has expended, and expects in the future to continue to expend, substantial financial and managerial resources as a result of these proceedings. Moreover, Affymetrix may not prevail in such proceedings or in similar proceedings relating to those or other patents. Affymetrix may not prevail in the appeal of the Incyte/Synteni interference. A failure to prevail could result in Affymetrix' inability to commercialize its products and also would enable others to copy aspects of Affymetrix' products. Affymetrix' intellectual property outside of the United States is expected to may be subject to significant additional administrative and litigation actions. For example, in Europe and Japan, third parties are expected to oppose significant patents owned or controlled by Affymetrix. Affymetrix expects in the future to expend substantial financial and managerial resources as a result of these proceedings. A failure to prevail could result in an inability to commercialize its products and also would enable others to copy aspects of its products. 27 38 THE MARKETS IN WHICH AFFYMETRIX COMPETES ARE RAPIDLY CHANGING, AND AFFYMETRIX MUST DEVELOP AND INTRODUCE NEW PRODUCTS AND TECHNOLOGIES TO REMAIN COMPETITIVE. Expression monitoring, polymorphism analysis and disease management technologies have undergone and are expected to continue to undergo rapid and significant change. Affymetrix future success will depend in large part on its ability to maintain a competitive position with respect to these and future technologies. Rapid technological development by Affymetrix or others may result in Affymetrix' products or technologies becoming obsolete. In addition, products offered by Affymetrix could be made obsolete by less expensive or more effective tests based on other technologies or by new therapeutic or prophylactic agents that obviate the need for the information Affymetrix' products generate. Moreover, Affymetrix efforts to develop research and disease management products based on its technologies will be subject to the risks of failure inherent in the development of products based on new technologies. These risks include: - - the potential discovery that these technologies will be found to be ineffective, unreliable or unsafe; - - difficulties in manufacturing Affymetrix' products cost effectively; - - difficulties in marketing Affymetrix' products on a large scale; - - the existence of third party proprietary rights precluding Affymetrix or its collaborative partners from manufacturing, using or selling products; - - the development of superior products by third parties; or - - the failure to receive necessary regulatory clearances. If Affymetrix is unable to develop the enhancements to its technology necessary to compete successfully with newly emerging technologies, or if Affymetrix is unable to develop products based on these technologies, its business, financial condition and results of operations will be materially and adversely affected. AFFYMETRIX' BUSINESS SUBSTANTIALLY DEPENDS UPON THE SUCCESS OF ITS PRODUCTS AS AN ALTERNATIVE TO CURRENT TECHNOLOGIES. The commercial success of Affymetrix' GeneChip system will depend upon market acceptance by pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. Market acceptance will depend on many factors, including: - - convincing researchers that the GeneChip system is an attractive alternative to other technologies for the acquisition, analysis and management of genetic information; - - Affymetrix' ability to manufacture products with acceptable variations in quality or performance; - - Affymetrix' ability to provide its customers with software that enables the integration and analysis of large volumes of genetic and other experimental data; - - the cost of Affymetrix' GeneChip system and access to probe arrays, which may deter certain potential customers of its products; - - any failure by Affymetrix in placing and servicing sufficient quantities of the GeneChip system; - - limitations in funding for commercial and academic research organizations that are the potential customers for the GeneChip system; - - the receipt of regulatory clearances in the United States, Europe, Japan and elsewhere; - - the availability of genetic content including proprietary markers that may be important for incorporation into Affymetrix' probe arrays; - - ethical concerns, which may limit the use of the GeneChip system for certain disease management applications or the analysis of genetic information; 28 39 - - the ability of laboratories to license other technologies, such as amplification technologies that may be required to use the GeneChip system for certain applications; and - - the inability of potential customers to employ skilled laboratory technicians necessary to operate the GeneChip system. Because of these and other factors, Affymetrix' products may not gain market acceptance. THE MARKETS IN WHICH AFFYMETRIX OPERATES ARE HIGHLY COMPETITIVE, AND IT MAY BE UNABLE TO COMPETE SUCCESSFULLY AGAINST NEW ENTRANTS AND ESTABLISHED COMPANIES WITH GREATER RESOURCES. Affymetrix competes in markets that are new, intensely competitive, highly fragmented and rapidly changing. Affymetrix has experienced and expects to continue to experience increased competition from current and potential competitors, many of which have significantly greater financial, technical, marketing and other resources. Currently, Affymetrix' principal competition comes from existing technologies and other DNA array technologies that are used to perform many of the same functions for which Affymetrix markets its GeneChip systems. In order to compete against existing and newly developed technologies and maintain pricing and gross margins, Affymetrix will need to be successful in asserting Affymetrix patents in the DNA array field and in demonstrating to potential customers that the GeneChip system provides improved performance and capabilities. In the expression monitoring and polymorphism analysis fields, existing competitive technologies include gel-based sequencing performed using instruments provided by companies such as the Applied Biosystems division of Perkin-Elmer and Amersham Pharmacia Biotech. A large number of publicly traded and privately held companies including CuraGen, Gene Logic, General Scanning, Inc., Corning, Genome Solutions, Hewlett Packard, Hitachi, Incyte/Synteni, Lynx and Motorola also are developing or have developed DNA probe based assays or other products and services, some of which may be competitive with Affymetrix'. Affymetrix' competitors may able to respond more quickly to new or emerging technologies and changes in customer requirements than Affymetrix can. In addition, current and potential competitors have greater name recognition, more extensive customer bases and access to proprietary content. THE LOSS OF A KEY CUSTOMER COULD ADVERSELY AFFECT AFFYMETRIX' REVENUES AND BE PERCEIVED AS A LOSS OF MOMENTUM IN ITS BUSINESS. Affymetrix' customers are concentrated in a small number of pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. For example, in 1998, two of Affymetrix' customers accounted for 20% and 16% of total revenues, respectively. Affymetrix expects that a small number of customers will continue to account for a substantial portion of revenues for the foreseeable future. As a result, if Affymetrix loses a major customer, its business, financial condition and results of operations may be adversely affected. Consolidation in the pharmaceutical and biotechnology industries may continue to occur. Planned or future consolidation among Affymetrix' current and potential customers could decrease or slow aggregate sales of its technology and shrink the research market or products target. Any such consolidation could have a material adverse effect on Affymetrix business, financial condition and results of operations. In addition, Affymetrix believes that the sales cycle for the GeneChip system will be lengthy due to the need to educate potential customers about its characteristics. Affymetrix' failure to gain additional customers, the loss of any customer or a significant reduction in the level of sales to any customer could have a material adverse effect on its business, financial condition and results of operations. 29 40 Furthermore, there are two major reference laboratories in the United States, one which is associated with a large pharmaceutical company. A decision by these reference laboratories not to purchase Affymetrix' GeneChip technology could adversely affect its business, results of operations and financial condition. In addition, Affymetrix' dependence on sales to a few customers may strengthen the negotiating position of its potential customers, which, in turn, could reduce the sales price of the GeneChip system and have a material adverse effect on Affymetrix' business, financial condition and results of operations. AFFYMETRIX' EFFORTS TO INCREASE ITS PRESENCE IN MARKETS OUTSIDE OF THE UNITED STATES MAY BE UNSUCCESSFUL AND COULD RESULT IN LOSSES. Affymetrix intends to expand its international presence in order to increase its export sales. Export sales to international customers entail a number of risks, each of which could have a material adverse effect on Affymetrix' business, financial condition and results of operations. These risks include: - - unexpected changes in, or impositions of, legislative or regulatory requirements; - - delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions; - - longer payment cycles and greater difficulty in accounts receivable collection; - - potentially adverse taxes; - - currency exchange fluctuations; - - the burdens of complying with a variety of foreign laws; and - - other factors beyond Affymetrix' control. Affymetrix is also subject to general geopolitical risks in connection with international operations, such as political, social and economic instability, potential hostilities and changes in diplomatic and trade relationships. Although Affymetrix has not to date experienced any negative impact on its operations as a result of such regulatory, geopolitical and other factors, such factors could have a material adverse effect on its business, financial condition and results of operations in the future or require it to modify its current business practices. AFFYMETRIX' EXISTING PRODUCTS MAY NOT BE COMMERCIALLY VIABLE. Because Affymetrix' products and systems have been in operation for a limited period of time, their accuracy and effectiveness have not been fully established. Accordingly, any of the following events may occur, each of which would have a material adverse effect on Affymetrix's business, financial condition and results of operations: - - the accuracy of the probe arrays in providing genetic information may not be equal to or better than current technologies, such as gel-based sequencing techniques; - - the probe arrays may not provide commercially useful information; - - the probe arrays or the GeneChip system may experience operational difficulties; - - Affymetrix may experience manufacturing problems or marketing difficulties selling the probe arrays to pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories; - - cost containment pressures for biomedical research and patient management may limit the price Affymetrix may be able to charge potential customers for its probe arrays; - - newly identified genetic information or incorrect genetic information deposited in the sequence databases upon which Affymetrix and its customers rely may require Affymetrix to redesign its current probe arrays or develop new probe arrays; - - technicians may not have adequate training to use the GeneChip system or interpret the results generated from the system; or - - the probe arrays and associated reagents may not gain regulatory approval for clinical use. 30 41 IF AFFYMETRIX IS UNABLE TO MAINTAIN ITS RELATIONSHIPS WITH COLLABORATIVE PARTNERS, AFFYMETRIX MAY HAVE DIFFICULTY SELLING ITS PRODUCTS AND SERVICES. Affymetrix believes that its success in penetrating its target markets depends in part on Affymetrix' ability to develop and maintain collaborative relationships with key pharmaceutical, diagnostic, biotechnology, bioinformatics, analytical instrument and reagent companies as well as with academic researchers, all in an effort to help develop, test, manufacture, sell and service our GeneChip technology. Affymetrix has significant relationships with Hewlett Packard, bioMerieux, Amersham Pharmacia Biotech KK and Roche Molecular Systems and Affymetrix has entered into a consortium with the Whitehead Institute, Millennium Pharmaceuticals and Bristol-Myers Squibb. Affymetrix has received a material portion of its revenue since inception from these and other collaborative partners. Affymetrix also intends to enter into collaborative arrangements with other companies to expand Affymetrix' operations, apply its technology, and commercialize potential future products. Affymetrix' present or future collaborative partners may not be able to perform their obligations as expected or devote sufficient resources to the development, clinical testing, supply or marketing of Affymetrix' potential products developed under these collaborations. Moreover, any of the following developments could have a material adverse effect on Affymetrix' business, financial condition and results of operations: - - one of Affymetrix' partners develops technologies or components competitive with Affymetrix' GeneChip system; - - Affymetrix' existing collaborations preclude it from entering into additional arrangements; - - failure of Affymetrix' partners to obtain timely regulatory approvals; - - premature termination of an agreement; - - one of Affymetrix' partners' failure to devote sufficient resources to the development and commercialization of its products; or - - inability of one of Affymetrix' partners to supply products to it. In addition, Affymetrix' agreements with its collaborators may have provisions that allow for termination or give rise to disputes regarding the rights and obligations of the parties. These and other possible disagreements could lead to termination of the agreement or delays in collaborative research, development, supply or commercialization of certain products, or could require or result in litigation or arbitration. Any such delay, litigation or arbitration could have a material adverse effect on Affymetrix' business, financial condition and results of operations. Any of Affymetrix' collaborations may prove to be unsuccessful. Likewise, Affymetrix may not be able to negotiate future collaborative arrangements on acceptable terms, if at all. AFFYMETRIX' FAILURE TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS COULD ADVERSELY AFFECT ITS ABILITY TO COMPETE. Affymetrix' competitive position in the future will depend in large part on its ability to do the following: - - strengthen and defend its patent position; - - preserve its copyrights and trade secrets; - - operate without infringing the proprietary rights of third parties; and - - acquire licenses related to enabling technology or products used with its GeneChip technology. Affymetrix' failure to successfully do any of these things will have a material adverse effect on its business, financial condition and results of operations. Moreover, the patent positions of pharmaceutical and biotechnology companies are generally uncertain and involve complex legal and factual questions. Affymetrix believes that there will continue to be significant litigation in the industry regarding patent and other intellec- 31 42 tual property rights. As a result, Affymetrix cannot guarantee: - - that any of Affymetrix' pending patent applications will result in issued patents; - - that Affymetrix will develop additional technologies that are patentable; - - that any patents issued to Affymetrix or its strategic partners will provide a basis for commercially viable products; - - that any patents issued to Affymetrix or its strategic partners will provide it with any competitive advantages; - - that any patents issued to Affymetrix or its strategic partners will not be challenged by third parties; or - - that the patents of others will not have a negative impact on Affymetrix' ability to do business. In addition, patent law relating to the scope of claims in the technology fields in which Affymetrix operates is still evolving and the extent of future protection for Affymetrix' proprietary rights is uncertain. Others may independently develop similar or alternative technologies, duplicate any of Affymetrix' technologies, or design around or invalidate Affymetrix' patented technologies. In addition, Affymetrix has and expects to continue to incur substantial costs in litigation to defend against the patent suits brought by third parties and when Affymetrix initiates such suits. In addition, administrative proceedings, such as interferences, in the United States Patent Office could substantially impact the scope of Affymetrix' patent protection as well as result in the expenditure of substantial funds in legal fees. Affymetrix has been notified that third parties are attempting to copy certain claims from two of its issued U.S. patents. As a result of these attempts, two interferences were declared with respect to two patents, '305 and '992. In both interference proceedings, the USPTO determined that Incyte/Synteni did not meet the burden of proof required to establish a case that the claims should be further evaluated in a full interference proceeding. Incyte/Synteni has indicated its intent to appeal this USPTO decision. Affymetrix may not prevail in such proceedings. A failure to prevail could result in Affymetrix' inability to commercialize its products and also would enable others to copy aspects of Affymetrix' products. Others have filed, and in the future are likely to file, patent applications that are similar or identical to those of Affymetrix or those of Affymetrix' licensors. To determine the priority of inventions, Affymetrix will have to participate in interference proceedings declared by the United States Patent and Trademark Office that could result in substantial cost to Affymetrix. Affymetrix cannot assure you that any such patent applications will not have priority over Affymetrix' patent applications. AFFYMETRIX DEPENDS ON A LIMITED NUMBER OF SUPPLIERS, AND AFFYMETRIX MAY NOT BE ABLE TO SHIP PRODUCTS ON TIME IF IT IS UNABLE TO OBTAIN AN ADEQUATE SUPPLY OF MANUFACTURING EQUIPMENT, RAW MATERIALS AND PRODUCT COMPONENTS ON A TIMELY BASIS. Affymetrix relies on Hewlett-Packard to manufacture, install and service its scanners and on Enzo to manufacture certain reagents used with probe arrays. Affymetrix' scanner, introduced in April 1997, is obtained from Hewlett-Packard under a supply agreement that expires in 2003. Affymetrix is dependent on Hewlett-Packard for quality testing, installation and service of this instrument. Certain labeling kits needed to process samples on GeneChip probe arrays are supplied to Affymetrix by Enzo under a supply agreement that expires in 2001. Affymetrix is obligated to purchase certain labeling kits from Enzo or compensate Enzo for any lost sales of these reagents. Certain key parts of the GeneChip system, such as the scanner, certain reagents kits and lithographic masks as well as certain equipment and raw materials used in the synthesis of probe arrays, are currently available only from a single source or a limited number of sources. In addition, components of Affymetrix' manufacturing equipment are available from one of only a few suppliers. No assurance can be given that 32 43 manufacturing equipment, scanners, reagents, lithographic masks or other components of the GeneChip system will be available in a timely fashion and in commercial quantities under acceptable terms. Even if alternative sources of supply are available, it could be time consuming and expensive for Affymetrix to qualify new vendors. In addition, Affymetrix is dependent on its vendors to provide components of appropriate quality and reliability and to meet applicable regulatory requirements. Consequently, in the event that supplies from these vendors were delayed or interrupted for any reason, Affymetrix could be delayed in its ability to develop and deliver products to its customers. Any such delay could have a material adverse effect on Affymetrix' business, financial condition and results of operations. AFFYMETRIX MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE. Affymetrix anticipates that its existing capital resources will enable it to maintain currently planned operations. However, this expectation is based on Affymetrix' current operating plan, which is expected to change as a result of many factors, and it may need additional funding sooner than anticipated. In addition, Affymetrix may choose to raise additional capital due to market conditions or strategic considerations even if it believes it has sufficient funds for its current or future operating plans. To the extent that additional capital is raised through the sale of other securities convertible into equity, the issuance of such securities could result in dilution to Affymetrix' stockholders. Affymetrix has no credit facility or other committed sources of capital. To the extent operating and capital resources are insufficient to meet future requirements, Affymetrix will have to raise additional funds to continue the development and commercialization of its technologies. Moreover, such funds may not be available on favorable terms, or at all. If adequate funds are not available on reasonable terms, Affymetrix may be required to curtail operations significantly or to obtain funds by entering into financing, supply or collaboration agreements on unattractive terms. Affymetrix' inability to raise capital could have a material adverse effect on its business, financial condition and results of operations. AFFYMETRIX MAY NOT BE ABLE TO DEVELOP OR ACCESS NEW TECHNOLOGIES NECESSARY TO STAY COMPETITIVE. As Affymetrix' technologies evolve, new manufacturing techniques and systems will be required. For example, it is anticipated that additional automated processing systems will be needed to meet Affymetrix' future probe array demand. Further, as products requiring increased density are developed, miniaturization of the features on the arrays will be necessary. This will require new or modified manufacturing equipment and processes. Affymetrix cannot be sure that it will be able to develop or access new manufacturing technologies. The failure to develop or access new technologies would have a material adverse effect on Affymetrix' business, financial condition and results of operations. AFFYMETRIX HAS LIMITED SALES, MARKETING AND TECHNICAL SUPPORT EXPERIENCE, WHICH MAY HURT ITS EFFORTS AT SELLING ITS PRODUCTS. Affymetrix currently has a limited direct sales, marketing and technical support organization and it has entered into a non-exclusive distribution agreement with Amersham Pharmacia Biotech KK covering Japan and a service agreement with Hewlett-Packard for its GeneArray scanner. Affymetrix' existing organization and relationships may not be sufficient and Affymetrix may be required to expand its organization and enter into additional collaboration or distribution arrangements to commercialize its products both inside and outside the United States. Affymetrix cannot assure you that: - - Affymetrix will be able to establish a sufficiently sized sales, marketing or technical support organization; 33 44 - - Amersham Pharmacia Biotech KK will be successful in distributing Affymetrix' products; - - Amersham Pharmacia Biotech KK will not sell competitive products in Japan; - - Hewlett-Packard will be successful in servicing Affymetrix' instruments and not become its competitor; or - - Affymetrix will be able to establish additional collaborative or distribution arrangements to sell, market and service its products. The failure to develop Affymetrix' sales, market and technical support capabilities, or the development of competing products by its collaborators, would have a material adverse effect on its business, financial condition and results of operations. CHANGES IN GOVERNMENT FUNDING OF RESEARCH INSTITUTIONS COULD ADVERSELY AFFECT AFFYMETRIX' BUSINESS. A significant portion of Affymetrix products for research use are sold to universities, government research laboratories, private foundations and other institutions whose funding is dependent upon grants from government agencies, such as the National Institute of Health. Research funding by the government, however, may be significantly reduced in the future. Any such reduction may have a negative impact on the ability of Affymetrix existing and prospective research customers to purchase Affymetrix' products for research use. AFFYMETRIX' BUSINESS MAY BE THREATENED BY SERIOUS ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENETIC TESTING. Affymetrix' success will depend in part upon its ability to develop tests for specific genetic information discovered by Affymetrix and others. These genetic tests have given rise to some difficult issues, including: - - once available, these tests may be subject to ethical concerns or reluctance to administer or pay for tests for conditions that are not treatable; and - - the possibility that specific gene-based diagnostic tests marketed by other companies could encounter public resistance, thereby resulting in societal and governmental concerns regarding genetic testing in general. The prospect of broadly available genetic predisposition testing has raised issues regarding the appropriate utilization and the confidentiality of information provided by this testing. Governmental authorities could limit the use of genetic testing or prohibit testing for genetic predisposition to certain conditions which could adversely affect the use of Affymetrix' products. As a result, ethical concerns about genetic testing may seriously affect market acceptance of Affymetrix' GeneChip system or give rise to legislative restrictions in some countries adversely affecting markets, thereby having a material adverse effect on Affymetrix' business, financial condition and results of operations. AFFYMETRIX MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL IT NEEDS TO SUCCEED. Affymetrix is highly dependent on the principal members of its management and scientific staff. The loss of services of any of these persons could have a negative impact on Affymetrix' product development and commercialization efforts. In addition, research, product development and commercialization will require additional skilled personnel in areas such as bioinformatics, organic chemistry, information services, regulatory affairs, manufacturing, sales, marketing and technical support. There is a shortage of skilled personnel, which is likely to continue for some time. As a result, competition for these people, particularly for employees with technical expertise, is intense and the turnover rate for these people is high. If Affymetrix is unable to hire, train and retain a sufficient number of qualified employees, its business, financial condition and results of operations could be materially and adversely affected. This inability could also hinder the planned expansion of its business. 34 45 In addition, Affymetrix relies on its scientific advisors and consultants to assist it in formulating its research, development and commercialization strategy. All of the scientific advisors and consultants are engaged by employers other than Affymetrix and have commitments to other entities that may limit their availability to Affymetrix. Some of Affymetrix' scientific advisors and consultants also consult for companies that may be its competitors. If Affymetrix is unable to retain its scientific advisors and consultants, its business, financial condition and results of operations could be materially and adversely affected. AFFYMETRIX MAY BE EXPOSED TO LIABILITY DUE TO PRODUCT DEFECTS. Affymetrix' business exposes it to potential product liability claims that are inherent in the testing, manufacturing, marketing and sale of human diagnostic and therapeutic products. Affymetrix intends to acquire additional insurance, should it be desirable, for clinical liability risks. Affymetrix may not be able to obtain this insurance or general product liability insurance on acceptable terms or at reasonable costs. In addition, this insurance may not be in sufficient amounts to provide it with adequate coverage against potential liabilities. A product liability claim or recall could have a material adverse effect on Affymetrix' business, financial condition and results of operations. GLAXO OWNS A SUBSTANTIAL PORTION OF AFFYMETRIX' OUTSTANDING CAPITAL STOCK. Glaxo Wellcome, plc and its affiliates currently beneficially own approximately 31% of the outstanding Affymetrix common stock. On August 2, 1999, Glaxo sold 1,000,000 shares of Affymetrix' common stock. On August 5, 1999, Glaxo Wellcome Americas, a wholly owned subsidiary of Glaxo, elected to convert all of the shares of Affymetrix' Series AA preferred stock that it held into 1,257,229 shares of Affymetrix' common stock at a conversion price of approximately $40 per share. Following the completion of these transactions, Glaxo's beneficial ownership of Affymetrix' capital stock fell from approximately 32% to approximately 31%. Although Affymetrix has executed a governance agreement with Glaxo, Glaxo nevertheless may be able to influence the outcome of shareholder votes, including votes concerning the election of directors, adoption of amendments to Affymetrix' certificate of incorporation and bylaws and approval of mergers and other significant corporate transactions. In addition, future sales by Glaxo may have an adverse effect on the price of Affymetrix common stock. AFFYMETRIX HAS VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS. In October 1998, Affymetrix adopted a stockholder rights plan and change of control policy. The purpose of the stockholder rights plan is to allow Affymetrix and its board of directors an opportunity to deal responsibly with parties that attempt to gain a control position in Affymetrix without the approval of the board of directors. The purpose of the change of control policy is to ensure that Affymetrix' employees are treated fairly in the event of a change of control. Affymetrix' stockholder rights plan and change of control policy may discourage, delay or prevent a change in control of Affymetrix that a stockholder may consider favorable. In addition, certain provisions of Affymetrix' certificate of incorporation and bylaws may discourage, delay or prevent a change in control of it that a stockholder may consider favorable. These provisions include: - - authorizing the issuance of "blank check" preferred stock; - - prohibiting cumulative voting in the election of directors; - - requiring super-majority voting to effect certain amendments to Affymetrix' certificate of incorporation and bylaws; - - limiting the persons who may call special meetings of stockholders; - - prohibiting stockholder action by written consent; and - - establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be 35 46 acted upon by stockholders at stockholder meetings. In addition, relevant provisions of Delaware law and Affymetrix' stock incentive plans may discourage, delay or prevent a change in control. AFFYMETRIX IS AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO STOCK PRICE VOLATILITY. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Due to the potential volatility of its stock price, Affymetrix may be the target of this type of litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources, which could have a material adverse effect on Affymetrix' business, financial condition and results of operations. IF AFFYMETRIX' PRODUCTS OR THE PRODUCTS UPON WHICH IT DEPENDS MALFUNCTION BECAUSE OF YEAR 2000 PROBLEMS, AFFYMETRIX' BUSINESS COULD BE ADVERSELY AFFECTED. Affymetrix is assessing the potential impact of the year 2000 computer problem on its products (including GeneChip systems and software), information systems, embedded systems (including computers used in its manufacturing process) and on the ability of certain third parties to supply critical materials and services as well as the readiness of certain customers. Affymetrix completed the assessment of its products, computer systems, embedded systems, certain third party suppliers and major customers in the second quarter of 1999, and plans to take necessary remediation action by the end of 1999. While Affymetrix does not anticipate a material business interruption to result from the year 2000 problem, it cannot guarantee that its products or systems will be year 2000 ready. In addition, Affymetrix could be adversely affected by the lack of year 2000 readiness of key third party suppliers and service providers and major customers. Affymetrix cannot guarantee that it or third parties will be year 2000 ready. Affymetrix has implemented a year 2000 contingency plan that involves purchasing and building inventory over the remainder of 1999 so that it will be able to continue to operate in the event of a modest and short-term supply shortage resulting from any year 2000 problems experienced by its suppliers. Finally, Affymetrix is also subject to external forces that might generally affect industry and commerce, such as utility and transportation failures. If any of Affymetrix' products, information systems, embedded systems, key third party suppliers and services providers and major customers are not year 2000 ready, Affymetrix may experience a business interruption which would have a material adverse effect on its business, results of operations and financial condition. COMPLIANCE WITH GOVERNMENT REGULATION IS CRITICAL TO AFFYMETRIX' BUSINESS. Affymetrix must comply with the Food and Drug Administration's regulations for sale of analyte-specific reagents, or ASRs, in the United States, ISO standards for sale of products in Europe, as well as other standards prescribed by various federal, state and local regulatory agencies in the United States and other countries. Although Affymetrix has filed an application for the registration of its manufacturing sites for its arrays as ASRs, Affymetrix cannot guarantee that it will be able to comply with the regulations at reasonable costs. In addition, many of Affymetrix' products, including its diagnostic products, will be regulated as medical devices and therefore be subject to approval by the United States Food and Drug Administration. Unless exempted by government regulation, there are two primary methods for securing FDA approval. First, the FDA determines that the proposed medical device can be marketed in the United States because it is substantially equivalent to an existing medical device already in the United States market and issues what is known as a 510(k) pre-market notification clearance. Second, the FDA may require that the new device satisfy a more in depth approval process, known as pre-market approval, or PMA. Both the 510(k) clearance and the PMA processes may require the presentation of a 36 47 substantial volume of clinical data, as well as a substantial review, thereby delaying the introduction of the new device into the market. Moreover, the PMA process requires extensive clinical studies, manufacturing information (including demonstration of compliance with quality systems requirements) and likely review by a panel of experts outside the FDA. FDA review of a PMA application could take significantly longer than that for a 510(k) application, thereby further delaying the introduction of the new medical device into the market. Finally, even if the FDA approves the new device, it may impose restrictions on Affymetrix' ability to market the device. Affymetrix cannot assure you that it will or its collaborators will be able to meet the FDA's requirements or receive FDA clearance for Affymetrix' products. Moreover, even if Affymetrix is exempt from approval or even if Affymetrix receives clearance, the FDA may impose restrictions on Affymetrix' marketing efforts. Finally, delays in the approval process may cause Affymetrix to introduce its products into the market later than anticipated. Any failure to obtain regulatory approval, restrictions on Affymetrix' ability to market its products, or delay in the introduction of Affymetrix' products to the market could have a material adverse effect on its business, financial condition and results of operations. Moreover, medical device manufacturers are subject to periodic inspections by the FDA and state agencies. If the FDA believes that a company is not in compliance with applicable laws or regulations, it can take any of the following actions: - - issue a warning or other letter notifying the particular manufacturer of improper conduct; - - impose civil penalties; - - detain or seize products; - - issue a recall; - - ask a court to seize products; - - enjoin future violations; - - withdraw clearances or approvals; or - - assess civil and criminal penalties against Affymetrix, its officers or its employees. If Affymetrix fails to comply with the FDA's requirements and is subject to any of the actions mentioned above, its business, financial condition or results of operations would be materially and adversely affected. Medical device laws and regulations are also in effect in many of the countries in which Affymetrix may do business outside the United States. These laws and regulations range from comprehensive device approval requirements for some or all of Affymetrix' medical device products to requests for product data or certifications. The number and scope of these requirements are increasing. Affymetrix may not be able to obtain regulatory approvals in these countries and it may be required to incur significant costs in obtaining or maintaining its foreign regulatory approvals. In addition, the export of certain of Affymetrix' products which have not yet been cleared for domestic commercial distribution may be subject to FDA export restrictions. Any failure to obtain product approvals in a timely fashion or to comply with state or foreign medical device laws and regulations may seriously harm Affymetrix' business, financial condition or results of operations. Affymetrix is also subject to numerous environmental and safety laws and regulations, including those governing the use, storage and disposal of hazardous and biological materials, and construction of new facilities. Affymetrix may not be able to obtain the necessary permits to operate new facilities. Any violation of, and the cost of compliance with, these regulations or permit requirements could have a material adverse effect on Affymetrix' business, financial condition and results of operations. AFFYMETRIX' SUCCESS DEPENDS ON ITS ABILITY TO EXPAND ITS SALES AND SUPPORT ORGANIZATIONS. Affymetrix has expanded the distribution of its products in recent years. This expansion has placed new and increased demands on its direct sales force and technical and sales support staff, including accounting controls. Affymetrix' ability to achieve revenue growth in the future 37 48 will depend, in part, on its success in recruiting and training sufficient direct sales, technical and support personnel. Although Affymetrix invests significant resources to expand its direct sales force and its technical and support staff, there is only a limited number of qualified personnel in these areas. Therefore, Affymetrix may not be able to expand its direct sales force and technical support staff as necessary to support its growing operations. In addition, such expansion may not result in increased revenues. Any failure to expand Affymetrix' direct sales force or technical and support staff or to expand its distribution channels could materially and adversely affect its business, operating results and financial condition. SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT AFFYMETRIX' CASH FLOW. Affymetrix has substantial amounts of outstanding indebtedness. There is the possibility that Affymetrix may be unable to generate cash sufficient to pay the principal of, interest on and other amounts due in respect to its indebtedness when due. Affymetrix also expects to add additional equipment loans and lease lines to finance capital expenditures and may obtain additional long term debt, working capital lines of credit and lease lines. There can be no assurance that any financing arrangements will be available. Affymetrix' substantial leverage could have significant negative consequences, including: - - increasing its vulnerability to general adverse economic and industry conditions; - - limiting its ability to obtain additional financing; - - requiring the dedication of a substantial portion of its expected cash flow from operations to service its indebtedness, thereby reducing the amount of its expected cash flow available for other purposes, including working capital and capital expenditures; - - limiting its flexibility in planning for, or reacting to, changes in its business and the industry in which it competes; or - - placing Affymetrix at a possible competitive disadvantage compared to less leveraged competitors and competitors that have better access to capital resources. AFFYMETRIX DEPENDS ON REIMBURSEMENT BY HEALTH CARE ORGANIZATIONS. Affymetrix' ability to commercialize certain products and services successfully may depend on the extent to which Affymetrix is able to secure reimbursement from government authorities, such as Medicare and Medicaid, private health insurers, and other organizations, such as health maintenance organizations. These third-party payors are increasingly likely to challenge the prices charged for health care products and services. The cumulative effect of the trend towards managed health care in the United States, legislative proposals to reform health care or reduce government insurance programs, and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care products and services, may result in lower prices for health care products and services commercialized by Affymetrix, Affymetrix' customers and its collaborative partners. This reduction in turn could reduce the amount of Affymetrix' future revenues or royalty payments that may be due to it. The lower prices could also harm Affymetrix' profits and the profits of its customers and collaborative partners. As a result, pharmaceutical, diagnostic and biotechnology companies may choose to reduce or eliminate certain research and development programs that utilize Affymetrix' products. Any such reduction of Affymetrix' revenues or royalty payments or the reduction or cancellation of research programs that utilize Affymetrix' products could seriously harm its business, financial condition and results of operations. 38 49 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS In addition to historical information, this document and, in the case of Affymetrix, the documents incorporated by reference in this document, contain forward-looking statements concerning Affymetrix and Genetic MicroSystems. These statements relate to future events or Affymetrix' or Genetic MicroSystems' future financial performance. In some cases, you can identify forward-looking statements by language such as "may," "will," "should," "expects," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other similar expressions. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under "Risk Factors" that may cause Affymetrix', Genetic MicroSystems', or Affymetrix' and Genetic MicroSystems' industry's actual results, levels of activity, performance or achievements to differ from results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. You should carefully consider the risks described in the "Risk Factors" section, in addition to the other information set forth in this document and the documents incorporated by reference in this document. Although Affymetrix and Genetic MicroSystems believe that the expectations reflected in the forward-looking statements are reasonable, Affymetrix and Genetic MicroSystems cannot guarantee future results, levels of activity, performance or achievements. Moreover, none of Affymetrix, Genetic MicroSystems or any other person assumes responsibility for the accuracy and completeness of such statements. Affymetrix and Genetic MicroSystems are under no duty to update any of the forward-looking statements after the date of this document to conform such statements to actual results. Affymetrix claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. THE COMPANIES AFFYMETRIX Affymetrix is recognized as a leader in developing and commercializing DNA chip probe array technology and systems. We have developed and presently market GeneChip systems, our proprietary probe array platform, which is used for acquiring, analyzing and managing complex genetic information to facilitate and improve the understanding, diagnosis, monitoring and treatment of disease. Our GeneChip system consists of disposable DNA probe arrays containing gene sequences on a glass chip, reagents for use with the probe arrays, a scanner and other instruments that process the arrays and software that analyzes and manages genetic information from the probe arrays. Commercial sales of our GeneChip system began in April 1996, and we currently sell our products to pharmaceutical and biotechnology companies, academic research centers and clinical reference laboratories. Affymetrix is a Delaware corporation and the shares of Affymetrix common stock trade on the NASDAQ National Market under the symbol "AFFX". Affymetrix' principal executive offices are located at 3380 Central Expressway, Santa Clara, California 95051, and its telephone number is (408) 731-5000. 39 50 Additional information concerning Affymetrix is included in Affymetrix' reports filed under the Securities Exchange Act of 1934, as amended, that are incorporated by reference in this document. See "Where You Can Find More Information" on page 94. GENETIC MICROSYSTEMS Genetic MicroSystems is a privately held corporation with fewer than ninety stockholders and no subsidiaries. Genetic MicroSystems was incorporated in Massachusetts in 1997 to develop innovative products for DNA microarray analysis. Genetic MicroSystems' goal is to advance genomics research and drug discovery by providing systems that enable scientists to make and use DNA microarrays in their own labs, in experiments of their own design. Along with an increase in the use of microarray technology, Genetic MicroSystems believes that its microarray analysis systems will facilitate a fundamental paradigm shift in genomics research and drug discovery, as scientists move from the study of individual reactions to the analysis of complex systems and pathways. The GMS(TM) Microarray Analysis System consists of two benchtop modules, the GMS 417(TM) Arrayer and the GMS 418(TM) Array Scanner, along with a software package that enables sample tracking and data analysis. Genetic MicroSystems currently has more than 60 employees. Genetic MicroSystems occupies approximately 30,000 square feet of office, R&D and manufacturing space in Woburn, Massachusetts. Genetic MicroSystems' principal executive offices are located at 34 Commerce Way, Woburn, Massachusetts 01801, and its telephone number is (781) 932-9333. 40 51 THE GENETIC MICROSYSTEMS SPECIAL MEETING GENERAL; DATE, PLACE AND TIME This document is being furnished to holders of Genetic MicroSystems stock in connection with the solicitation of proxies by the Genetic MicroSystems board of directors for use at the special meeting of stockholders of Genetic MicroSystems to be held on --, 1999, at 10:00 a.m. local time, at the offices of Genetic MicroSystems located at 34 Commerce Way, Woburn, Massachusetts 01801, and at any adjournment or postponement of the meeting. MATTERS TO BE CONSIDERED At the special meeting, Genetic MicroSystems stockholders will be asked to consider and vote upon the following: - a proposal to adopt the merger agreement; - the appointment of Jean Montagu as Stockholder Representative under the merger agreement and the escrow agreement; and - such other matters as may properly be brought before the special meeting or any adjournment or postponement thereof. In addition, at the special meeting, holders of Genetic MicroSystems Series A convertible preferred stock will be asked to vote on the proposal that the merger does not constitute a liquidation, dissolution or winding up of Genetic MicroSystems. BOARD OF DIRECTORS' RECOMMENDATION The Genetic MicroSystems board has unanimously approved the merger agreement and recommends a vote FOR: adoption of the merger agreement and approval of the merger; the proposal that the merger does not constitute a liquidation, dissolution or winding up of Genetic MicroSystems; and appointment of Jean Montagu as stockholder representative. RECORD DATE The board of directors of Genetic MicroSystems fixed the close of business on --,1999 as the record date for the special meeting. Accordingly, only holders of Genetic MicroSystems capital stock of record at the close of business on --, 1999, will be entitled to notice of, and to vote at, the special meeting. STOCKHOLDERS ENTITLED TO VOTE As of the close of business on the record date, there were 1,006,702 shares of common stock, 2,000,000 shares of Series A convertible preferred stock and 431,977 shares of Series B convertible preferred stock of Genetic MicroSystems outstanding and entitled to vote. The holders of common stock are entitled to cast one vote for each share of common stock they hold on each matter submitted to the common stockholders for a vote at the special meeting. The holders of Series A convertible preferred stock and Series B convertible preferred stock are entitled to cast one vote for each share of common stock into which their Series A convertible preferred stock or Series B convertible preferred stock, as the case may be, could then be converted on each matter submitted to a vote at the special meeting. However, with respect to the proposal that the merger does not 41 52 constitute a liquidation, which only holders of Genetic MicroSystems Series A convertible preferred stock will be entitled to vote on such proposal at the special meeting. The presence in person or by proxy of the holders of a majority of the shares of Genetic MicroSystems stock entitled to vote is necessary to constitute a quorum for the transaction of business at the special meeting. Shares of Genetic MicroSystems capital stock represented in person or by proxy will be counted for the purpose of determining whether a quorum is present at the special meeting. Shares that abstain from voting will also be treated as shares that are present and entitled to vote at the special meeting for purposes of determining whether a quorum exists. If a stockholder abstains from voting, that abstention will have the practical effect of voting against the adoption of the merger agreement. REQUIRED VOTE Approval of the merger agreement under Genetic MicroSystems' restated articles of organization requires the affirmative vote of the holders of: - at least two-thirds of the outstanding shares of common stock; - a majority of the outstanding shares of Series A convertible preferred stock, voting as a separate class; and - at least two-thirds of the outstanding shares of Series A convertible preferred stock and Series B convertible preferred stock voting, together as a single class. A majority of the holders of Series A convertible preferred stock, voting as a separate class, must elect not to treat the merger as a liquidation, dissolution, or winding up of Genetic MicroSystems. Lastly, a majority of the holders of Genetic MicroSystems common stock and convertible preferred stock, voting together as a single class, must appoint Jean Montagu as stockholder representative. PROXIES This document is being furnished to Genetic MicroSystems stockholders in connection with the solicitation of proxies by the Genetic MicroSystems board of directors for use at the Genetic MicroSystems special meeting, and is accompanied by a form of proxy. All shares of Genetic MicroSystems stock that are entitled to vote and are represented at the Genetic MicroSystems special meeting by properly executed proxies received before or at the meeting, and not revoked, will be voted at the meeting in accordance with the instructions indicated on the proxies. If a proxy is properly executed but no vote is specified, the proxy will be voted for adoption of the merger agreement and approval of the merger, except for proxies submitted by record holders of shares of Genetic MicroSystems stock who indicate that they have not received voting instructions from the beneficial holders of those shares. If any other matters are properly presented for consideration at the Genetic MicroSystems special meeting, the persons named in the enclosed form of proxy will have the discretion to vote on those matters using their best judgment. Additional matters which may come before the meeting include consideration of a motion to adjourn the meeting to another time and/or place, which may be necessary for the purpose of soliciting additional proxies from Genetic MicroSystems stockholders. The proxy holders will not adjourn the meeting if there are insufficient votes to approve the proposals at the date of the meeting. 42 53 REVOCABILITY OF PROXIES Any person who gives a proxy pursuant to this solicitation may revoke it at any time before it is voted. To revoke a proxy, you must: - submit a later dated proxy with respect to the same shares at any time before the vote on the adoption of the merger agreement, - deliver written notice of revocation to the Clerk of Genetic MicroSystems at any time before the vote, or - attend the special meeting and vote in person. Your attendance at the special meeting alone is not sufficient to revoke a proxy. Any written notice of revocation or subsequent proxy must be delivered at or before the taking of the vote at the special meeting to Genetic MicroSystems, Inc., 34 Commerce Way, Woburn, Massachusetts 01801, Attention: Peter Lewis, Corporate Clerk. SOLICITATION OF PROXIES The expenses of the solicitation of proxies for the special meeting will be borne by Affymetrix, including the cost of printing and mailing this document. In addition to solicitation by mail, directors, officers and employees of Genetic MicroSystems may solicit proxies in person or by telephone, fax or other means of communication. These directors, officers and employees will not receive additional compensation. GENETIC MICROSYSTEMS STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS. APPRAISAL RIGHTS If the merger is completed, holders of Genetic MicroSystems capital stock who object to the merger are entitled to appraisal rights under Massachusetts law. In order to exercise appraisal rights, Genetic MicroSystems stockholders must strictly adhere to the provisions of Massachusetts law governing appraisal rights. The following is a summary of the relevant provisions of Massachusetts law. The description below is only a summary and is qualified by reference to the relevant provisions of Massachusetts law, a copy of which is attached hereto as Appendix E. In order to exercise your appraisal rights, you must take the following steps: - send a written objection to the merger to Genetic MicroSystems before the special meeting stating your intention to demand payment for your shares of Genetic MicroSystems capital stock if the merger is approved and the merger occurs; - DO NOT vote in favor of the merger; and - send a written demand to Genetic MicroSystems for payment for your Genetic MicroSystems shares within twenty days after you receive notice from Genetic MicroSystems that the merger has occurred (Genetic MicroSystems will send the notice within 10 days after the merger is completed). The written objection and written demand should be delivered to Genetic MicroSystems, Inc., 34 Commerce Way, Woburn, Massachusetts 01801, Attention: Peter Lewis, Corporate Clerk. We 43 54 recommend that you send the objection and demand by registered or certified mail, return receipt requested. Please note that, if you file a written objection with Genetic MicroSystems prior to the special meeting, you do not need to vote against the merger. However, if you file a written objection with Genetic MicroSystems prior to the special meeting and vote in favor of the merger, you will be deemed to have waived your right to exercise appraisal rights. If you have followed the procedures set forth above and the merger is completed, Genetic MicroSystems will contact you within 10 days after the effective time of the merger in order to determine the fair value of your Genetic MicroSystems capital stock. The "fair value" of your Genetic MicroSystems capital stock will be determined as of the day before approval of the merger by the Genetic MicroSystems stockholders and will exclude any value arising from the expectation of the merger. If Genetic MicroSystems and you have not agreed as to the fair value of your stock within 30 days after you receive notice from Genetic MicroSystems that the merger has occurred, both you and Genetic MicroSystems will have the right to have the court determine the fair value by filing a bill in equity in the Superior Court Department of Middlesex County, Massachusetts no later than four months after the expiration of the negotiation period. After filing the bill in equity, the court or a special master will hold a hearing and enter a decree determining the fair value of your Genetic MicroSystems capital stock and ordering Genetic MicroSystems to make payment to you of such value. You will also be paid interest from the date of the special meeting to the time that you surrender your certificates representing your shares of Genetic MicroSystems capital stock to the exchange agent. The determination of fair value made by the court or special master will be binding on and enforceable by you and the other Genetic MicroSystems stockholders who have properly executed their appraisal rights. The fair value of the Genetic MicroSystems capital stock could be worth more than, the same as or less than the value of the Affymetrix common stock you would otherwise have received by exchanging your shares of Genetic MicroSystems capital stock for shares of Affymetrix common stock. Your appraisal rights are your only remedy if you object to the merger, unless the merger is determined to have been illegal, fraudulent or in breach of the fiduciary duties of the Genetic MicroSystems board of directors. If you exercise your appraisal rights, after the merger is completed you will not have any rights as a Genetic MicroSystems or Affymetrix stockholder, including the right to receive notices of meetings, vote at meetings or receive dividends, if any. 44 55 THE MERGER The discussion in this document of the merger and the material terms of the merger agreement is subject to, and qualified in its entirety by reference to, the merger agreement, a copy of which is attached to this document as Appendix A, and is incorporated in this document by reference. A summary of the material terms of the merger agreement may be found in this document under the heading "Merger Agreement," however, we urge you to read the merger agreement in its entirety for a more complete description of the terms and conditions upon which the merger is to be effected. GENERAL If the merger agreement is adopted by the holders of two-thirds of the outstanding shares of Genetic MicroSystems common stock and convertible preferred stock entitled to vote at the special meeting and the other conditions to closing are satisfied or waived, Genetic MicroSystems will be merged with and into GMS Acquisition, a wholly owned subsidiary of Affymetrix. As a result of the merger, Genetic MicroSystems will become a wholly owned subsidiary of Affymetrix. In the merger each holder of Genetic MicroSystems stock will be entitled to receive from Affymetrix, in exchange for each share of Genetic MicroSystems stock, an amount of Affymetrix common stock equal to an exchange ratio calculated as described below. MERGER CONSIDERATION As provided in the merger agreement, Affymetrix will exchange an aggregate of up to 1,070,000 shares of Affymetrix common stock for all the Genetic MicroSystems common and convertible preferred shares: - issued and outstanding immediately prior to the effective time of the merger; and - subject to options or warrants immediately prior to the effective time of the merger, whether vested or unvested or currently exercisable or unexercisable. The number of Affymetrix shares to be received by each Genetic MicroSystems stockholder will be calculated immediately prior to the effective time of the merger by dividing 1,070,000 by the aggregate number of Genetic MicroSystems shares issued and outstanding and Genetic MicroSystems shares subject to Genetic MicroSystems options or warrants. Based on the number of shares, options and warrants outstanding as of October 13, 1999, stockholders of Genetic MicroSystems will receive approximately 0.2832 of a share of Affymetrix common stock for each share of Genetic MicroSystems common stock or convertible preferred stock. This exchange ratio, however, is subject to reduction if Genetic MicroSystems issues or grants additional shares, options or warrants in the ordinary course of business prior to the effective time of the merger. In addition, pursuant to the terms of the merger agreement and the escrow agreement, 10% of the aggregate number of shares of Affymetrix common stock to be delivered by Affymetrix at the closing of the merger will be placed in an escrow fund to satisfy certain indemnification obligations of Genetic MicroSystems. See "The Merger Agreement -- Indemnification and Liability Obligations" on page 64 and "Escrow Agreement" on page 68. Each outstanding option or warrant to purchase Genetic MicroSystems common stock or convertible preferred stock, will be converted into an option or warrant to acquire the number of shares of Affymetrix common stock that the holder would have received in the merger if the holder had exercised the option or warrant immediately prior to the closing of the merger and the exercise price will be adjusted appropriately. 45 56 Genetic MicroSystems stockholders will not receive fractional shares of Affymetrix common stock. Instead, a stockholder will receive the cash value, without interest, of any fractional share of Affymetrix common stock that a stockholder might otherwise have been entitled to receive, which payment represents the stockholder's proportionate interest in the net proceeds from the sale by the exchange agent of the aggregate fractional shares of Affymetrix common stock. SCHEDULE OF IMPORTANT DAYS The following schedule shows important dates and events in connection with the special meeting and the merger:
DATES EVENTS - ----- ------ - --..................................... Record date for the Genetic MicroSystems special meeting - --..................................... Genetic MicroSystems special meeting and target date for consummation of the merger
BACKGROUND OF THE MERGER In September 1998, representatives of Genetic MicroSystems and Affymetrix met informally at an industry conference in Miami, Florida. At this meeting, the parties discussed the possibility of a license to Genetic MicroSystems of certain Affymetrix intellectual property. By spring of 1999, the parties had entered into a confidentiality agreement and discussions moved to a possible collaborative relationship between the companies, ranging from collaboration on instrument development to the possibility of Affymetrix' acquiring Genetic MicroSystems. At various times between June and July of 1999, Affymetrix made proposals to Genetic MicroSystems for a stock-for-stock merger. Genetic MicroSystems rejected these proposals and made counteroffers, concluding that in each case the Affymetrix proposal was inadequate in light of the circumstances existing at the time the proposal was made. On July 6, 1999, Affymetrix and Genetic MicroSystems discussed an acquisition price valued at $85 million in Affymetrix common stock, pending additional financial and legal due diligence. On July 8, 1999, at a telephonic meeting of Affymetrix' board, Stephen Fodor, the Chief Executive Officer of Affymetrix, updated Affymetrix' directors on the state of negotiations with Genetic MicroSystems. During the months of July and August, both Affymetrix and Genetic MicroSystems engaged in financial and legal due diligence. During this time, Genetic MicroSystems engaged Palmer & Dodge, LLP as its legal advisor and Affymetrix engaged Sullivan & Cromwell as its legal advisor. Neither Genetic MicroSystems nor Affymetrix engaged any investment bankers or financial advisors in connection with the Merger. On August 18, 1999, Affymetrix management provided a summary document of the acquisition proposals, due diligence progress and outstanding negotiation points to Affymetrix' board of directors. On August 19, 1999, Sue Siegel, the then Senior Vice President of Marketing and Sales and currently the President of Affymetrix, provided a revised proposal for a stock-for-stock merger to Jean Montagu, President and Chief Executive Officer of Genetic MicroSystems. Based on the average closing price of Affymetrix common stock for the 40 consecutive trading days prior to the date of the proposal, the proposal had a value of $70 million in Affymetrix common stock. 46 57 Mr. Montagu agreed to consider the new proposal and to discuss it with Genetic MicroSystems' senior management and board. Mr. Montagu met with Genetic MicroSystems' senior managers, as well as its legal advisor. After extensive discussions regarding the strategic benefits of the merger, technology leveraging, synergies and other financial and operating benefits that could be obtained through a merger between the two companies, Genetic MicroSystems decided to meet again with Affymetrix to discuss its proposal. On August 24, 1999, in a conference call between the senior managers and legal advisors of each of Affymetrix and Genetic MicroSystems, the parties agreed to proceed based upon an acquisition price of up to 1,070,000 shares of Affymetrix common stock for all the issued and outstanding Genetic MicroSystems stock and all of the shares of Genetic Microsystems stock subject to stock options and warrants. Shortly thereafter, the parties executed an exclusivity agreement and began negotiating the terms of the proposed merger. On August 25, 1999, at an Affymetrix telephonic board meeting, various members of Affymetrix' management team provided information to the board of directors of Affymetrix regarding results of the due diligence review, technical parameters of Genetic MicroSystems' product line and its performance, the potential structure of an acquisition, the business risks involved with an acquisition of Genetic MicroSystems and certain other issues relating to the merger. On September 8, 1999 and September 9, 1999, the senior managers and legal advisors of both Affymetrix and Genetic MicroSystems met at the offices of Sullivan & Cromwell in New York City to discuss and negotiate the terms of the proposed merger. On September 9, 1999, Affymetrix' board held a telephonic board meeting to consider approval of the merger agreement, the stock option agreement and certain voting agreements and the transactions contemplated by those agreements. After questions by and discussion among Affymetrix' board, the Affymetrix board, by a unanimous vote of directors present and voting, adopted the merger agreement and approved entering into the merger agreement, stock option agreement, certain voting agreements and the transactions contemplated by those agreements. Also on September 9, 1999, the board of Genetic MicroSystems held a telephonic board meeting to consider the merger agreement and the stock option agreement and the transactions contemplated by those agreements. After hearing presentations from its legal advisors and discussing the matter, Genetic MicroSystems' board unanimously approved entering into the merger agreement and the stock option agreement and the transactions contemplated by those agreements. On September 10, 1999, Affymetrix and Genetic MicroSystems entered into the merger agreement, the stock option agreement and a letter of intent to negotiate the terms of an escrow agreement. Also on that date, certain significant stockholders of Genetic MicroSystems executed voting agreements granting Affymetrix sufficient voting power to effect the merger. The transaction was publicly announced on September 13, 1999. Shortly after the execution of the merger agreement and the stock option agreement and as contemplated by the merger agreement, Genetic MicroSystems, Affymetrix, Mr. Montagu and Bank One, as escrow agent, entered into an escrow agreement dated as of September 10, 1999. 47 58 GENETIC MICROSYSTEMS' REASONS FOR THE MERGER; RECOMMENDATION OF THE GENETIC MICROSYSTEMS BOARD In reaching its decision to approve the merger agreement and to recommend approval of the merger agreement by the Genetic MicroSystems stockholders, the Genetic MicroSystems board of directors consulted with its management team and legal advisors. Genetic MicroSystems did not employ the services of any investment bankers or financial advisors in connection with the merger. Genetic MicroSystems' board of directors also independently considered the proposed merger agreement and the transactions contemplated by the merger agreement. The following factors considered by the Genetic MicroSystems board of directors in making its decision is not intended to be exhaustive but includes all material factors considered. Genetic MicroSystems' board believes the following factors are reasons that the merger will be beneficial to Genetic MicroSystems and its stockholders: - the markets addressed by Genetic MicroSystems and Affymetrix are complementary and that customers would be beneficially served by a broad solution to their microarray needs and through expansion of the total market; - synergies exist between Genetic MicroSystems and Affymetrix with regard to instrumentation development as well as expansion of the sales, service and customer support network; - Affymetrix owns and has rights to considerable intellectual property that Genetic MicroSystems could obtain rights to, thus enabling a greater freedom to serve its customers efficiently; - the merger would provide access to capital resources needed to compete in this rapidly expanding marketplace; and - through a tax free reorganization, the opportunity to own stock of the combined entity would provide stockholders with greater liquidity and a possibility of a better return on stockholder investment. In the course of its deliberations, the Genetic MicroSystems board of directors and senior managers reviewed a number of other factors relevant to the merger. In particular, the Genetic MicroSystems board of directors considered, among other things: - information relating to the business, assets, management, competitive position, operating performance, trading performance and prospects of each of Genetic MicroSystems and Affymetrix, including the prospects of Genetic MicroSystems if it were to continue as an independent company; - the current and historical market prices of the Affymetrix common stock and the risks associated with ownership of Affrymetrix common stock; - the possibility of strategic alternatives to the merger for enhancing long-term stockholder value; - the impact of the merger on Genetic MicroSystems' and Affymetrix' customers, suppliers and employees; - the likelihood that the merger would be completed; - the terms of the merger agreement, including balanced representations and warranties, balanced conditions to closing and rights of termination, and provisions permitting the Genetic MicroSystems board of directors to terminate the merger agreement in response to a third 48 59 party proposal which the Genetic MicroSystems board of directors determines in its good faith judgment to be more favorable to Genetic MicroSystems stockholders than the merger; and - the expected qualification of the merger as a reorganization under Section 368(a) of the Internal Revenue Code. The Genetic MicroSystems board of directors also identified and considered a number of potentially negative factors in its deliberations concerning the merger, including: - the risk that the operations of Affymetrix and Genetic MicroSystems might not be successfully integrated; - the risk that, despite the efforts of Affymetrix and Genetic MicroSystems after the merger, key personnel might leave the combined company; - the difficulty of managing operations in the different geographic locations in which Genetic MicroSystems and Affymetrix operate and will continue to operate; and - the risk that the potential benefits of the merger might not be fully realized. The Genetic MicroSystems board of directors believes that certain of these risks are unlikely to occur, that Genetic MicroSystems can avoid or mitigate others, and that, overall, these risks are outweighed by the potential benefits of the merger. In view of the variety of factors considered in connection with its evaluation of the merger agreement and the merger, Genetic MicroSystems' board of directors did not find it practicable to and did not quantify or otherwise assign relative weight to the specific factors considered in making its determination. In addition, individual members of Genetic MicroSystems' board of directors may have given different weight to different factors. MATERIAL FEDERAL INCOME TAX CONSEQUENCES The following is a summary of the material anticipated U.S. federal income tax consequences of the merger. This summary is limited to United States Persons (as defined below) who hold their Genetic MicroSystems stock as a "capital asset" and whose "functional currency" is the U.S. dollar ("U.S. Holders"). This summary is based on the Internal Revenue Code of 1986, Treasury regulations, administrative rulings and court decisions, all as in effect as of the date hereof and all of which are subject to change at any time, possibly with retroactive effect, or different interpretation. This summary is not a complete description of all of the considerations that may be relevant to a decision whether to approve the merger and, in particular, may not address U.S. federal income tax considerations applicable to stockholders subject to special treatment under U.S. federal income tax law, which would include, for example, non-U.S. persons, financial institutions, regulated investment companies, real estate investment trusts, real estate mortgage investment conduits, financial asset securitization investment trusts, dealers in securities or currencies, traders in securities that elect to mark to market, insurance companies, tax-exempt entities, holders owning Genetic MicroSystems stock as part of a hedge, straddle, short sale or conversion transaction, and holders who acquired their Genetic MicroSystems stock as a result of the exercise of an employee option or otherwise as compensation. In addition, no information is provided herein with respect to the tax consequences of the merger under applicable foreign, state or local laws. HOLDERS OF GENETIC MICROSYSTEMS STOCK ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE FEDERAL INCOME AND OTHER TAX CONSEQUENCES OF THE MERGER TO THEM, INCLUDING THE EFFECTS OF STATE, LOCAL AND FOREIGN TAX LAWS. 49 60 "United States Person" means: - a citizen or resident of the United States; - a corporation created or organized in or under the laws of the United States or any state thereof; - an estate whose income is subject to United States federal income tax regardless of its source; or - a trust if a United States court can exercise primary supervision over the trust's administration and one or more United States persons are authorized to control all substantial decisions of the trust or a trust that has made a valid election to be taxed as a domestic trust for United States federal income tax purposes. Affymetrix and Genetic MicroSystems have not requested and do not plan to request any rulings from the IRS concerning the tax treatment of the merger. The statements in this document and the opinions of counsel referred to herein are not binding on the IRS or a court. As a result, neither Affymetrix nor Genetic MicroSystems can assure you that the tax considerations or opinions contained in this summary will not be challenged by the IRS or sustained by a court if challenged by the IRS. This summary is based upon the opinion of Sullivan & Cromwell, counsel to Affymetrix, and Palmer & Dodge LLP, counsel to Genetic MicroSystems. These opinions, which are attached as Exhibits 8.1 and 8.2 to this Registration Statement, are based upon certain facts, assumptions and representations, including the assumption that the merger will be consummated as described in this document and that the representations contained in certificates of officers of Affymetrix, GMS Acquisition and Genetic MicroSystems delivered in connection with the tax opinions will be accurate through the closing of the merger. Based on the foregoing, the merger will constitute a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code. As a "reorganization," the merger will have the following principal U.S. federal income tax consequences: - no gain or loss will be recognized by Affymetrix, GMS Acquisition, Inc. or Genetic MicroSystems by reason of the merger; - no gain or loss will be recognized by U.S. Holders of Genetic MicroSystems stock who exchange their Genetic MicroSystems stock for Affymetrix common stock pursuant to the merger, except with respect to any cash received in lieu of a fractional share of Affymetrix common stock (as discussed below); - the aggregate tax basis of the Affymetrix common stock received in the merger by each U.S. Holder of Genetic MicroSystems stock will be the same as the aggregate tax basis of the Genetic MicroSystems stock surrendered in exchange therefor, reduced by any amount of tax basis allocable to a fractional share interest in Affymetrix common stock for which cash is received; and - the holding period of Affymetrix common stock received in the merger will include the holding period for the Genetic MicroSystems stock surrendered in exchange therefor. Cash received by a U.S. Holder of Genetic MicroSystems stock in lieu of a fractional share of Affymetrix common stock will be treated as received in disposition of such fractional share. Such holder will generally recognize capital gain or loss measured by the difference between the amount of cash received and the portion of the tax basis of such holder's Genetic MicroSystems stock allocable to the fractional share interest. In addition, a U.S. Holder of Genetic MicroSystems stock who exercises appraisal rights and receives solely cash in exchange for such holder's Genetic MicroSystems stock will generally recognize capital gain or loss measured by the difference between 50 61 the amount of cash received therefor and the tax basis of such holder's Genetic MicroSystems stock surrendered. However, dissenters that also own Affymetrix stock (directly or constructively) could possibly be subject to dividend treatment on this cash payment. Such capital gain or loss, in either case, will be long-term capital gain or loss if such holder has held its Genetic MicroSystems stock for more than one year. In the case of individuals, the maximum federal income tax rate applicable to long-term capital gains is generally 20%. In addition, the obligations of the parties to consummate the merger are conditioned upon the receipt by Affymetrix of an opinion from Sullivan & Cromwell, and the receipt by Genetic MicroSystems of an opinion from Palmer & Dodge LLP, in each case based upon certain facts, assumptions and representations, that the merger will constitute a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code and that Affymetrix, Genetic MicroSystems and GMS Acquisition, Inc. will be "parties to the reorganization" within the meaning of Section 368(b) of the Internal Revenue Code. BACKUP WITHHOLDING. Unless a holder of Genetic MicroSystems stock complies with certain reporting and/or certification procedures or establishes that it is an exempt recipient, cash payments in exchange for such holder's Genetic MicroSystems stock in the merger may be subject to "backup withholding" at a rate of 31% for federal income tax purposes. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against the holder's federal income tax liability, provided the required information is furnished to the IRS. THE ABOVE SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL OF THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. THIS DISCUSSION IS INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY AND SHOULD NOT BE CONSIDERED AS LEGAL OR TAX ADVICE. THIS SUMMARY MAY NOT APPLY TO A PARTICULAR STOCKHOLDER IN LIGHT OF SUCH STOCKHOLDER'S PARTICULAR CIRCUMSTANCES. ACCOUNTING TREATMENT Completion of the merger is conditioned on receipt by Affymetrix and Genetic MicroSystems of a letter from Ernst & Young LLP, their respective independent auditors, regarding the appropriateness of "pooling-of-interests" accounting for the merger if closed and consummated in accordance with the merger agreement. Under this method of accounting, Affymetrix will retroactively restate its consolidated financial statements at the effective time of the merger to include the assets, liabilities, stockholders' equity and results of operations of Genetic MicroSystems as if the companies had always been combined. See "The Merger Agreement -- Conditions of the Merger" on page 55 and "The Merger Agreement -- Additional Covenants -- Pooling-of-Interests" on page 60. The unaudited pro forma financial information contained in this document has been prepared using the "pooling-of-interests" method of accounting. REGULATORY APPROVALS HART-SCOTT-RODINO The Federal Trade Commission, or the FTC, and the Antitrust Division of the Department of Justice, or the DOJ, frequently scrutinize the legality under the antitrust laws of transactions such as the merger. At any time before or after the merger, the DOJ or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the merger of seeking divestiture of substantial assets of Affymetrix or Genetic MicroSystems or their subsidiaries. Private parties and state attorneys general may also bring an action under the antitrust laws under certain circumstances. There can be no assurance that a challenge to the merger on antitrust grounds will not be made or, if such a challenge is made, of the result. 51 62 On October 6, 1999, Affymetrix and Genetic MicroSystems filed their respective Pre-Merger Notification and Report Forms with the FTC and the DOJ under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, otherwise known as the HSR Act. The HSR Act, and the rules and regulations thereunder, provide that certain merger transactions, including the merger, may not be consummated until required information and materials have been furnished to the DOJ and the FTC and certain waiting periods have expired or been terminated. Pursuant to the HSR Act, Affymetrix and Genetic MicroSystems requested early termination of the 30-day HSR Act waiting period. There can be no assurances given, however, that the 30-day HSR Act waiting period will be terminated early. If either the FTC or the DOJ were to request additional information or documentary material from Affymetrix or Genetic MicroSystems, the waiting period would expire at 11:59 p.m., Eastern time, on the tenth calendar day after the date of substantial compliance by Affymetrix and Genetic MicroSystems with such request. Thereafter, the waiting period could be extended only by agreement or by court order. Only one extension of the waiting period pursuant to a request for additional information is authorized by the rules promulgated under the HSR Act, except by agreement or by court order. OTHER REGULATORY APPROVALS The merger is conditioned on all filings required to be made prior to the effective time of the merger by Affymetrix and Genetic MicroSystems, and all consents, approvals and authorizations required to be obtained prior to the effective time by Affymetrix and Genetic MicroSystems from any governmental entity in connection with the execution and delivery of the merger agreement and the consummation of the transactions contemplated hereby by Affymetrix and Genetic MicroSystems having been made or obtained. FEDERAL SECURITIES LAWS CONSEQUENCES All shares of Affymetrix common stock received by Genetic MicroSystems stockholders in the merger who are not affiliates of Genetic MicroSystems prior to the merger will be freely transferable. However, shares of Affymetrix common stock received by persons who are deemed to be affiliates of Genetic MicroSystems prior to the merger may be resold by them only in transactions permitted by the resale provisions of Rule 145 under the Securities Act of 1933, or Rule 144 promulgated under the Securities Act in the case of such persons who become affiliates of Affymetrix, or as otherwise permitted under the Securities Act. Persons deemed to be affiliates of Genetic MicroSystems are those individuals or entities that control, are controlled by, or are under common control with, Genetic MicroSystems. Affiliates generally include executive officers and directors of Genetic MicroSystems as well as certain principal stockholders of Genetic MicroSystems. This document does not cover any resales of Affymetrix common stock received by affiliates of Genetic MicroSystems in the merger. NASDAQ NATIONAL MARKET TRADING It is a condition to the merger that Affymetrix file the appropriate notification form for quotation of Affymetrix common stock to be issued in the merger with the NASDAQ and pay the applicable fee. Therefore, prior to consummation of the merger, Affymetrix common stock to be issued in connection with the merger will be approved for quotation on the NASDAQ National Market. If we complete the merger, stockholders will be able to trade the shares of Affymetrix common stock they receive in the merger on the NASDAQ National Market. Genetic MicroSystems is a privately held company with fewer than ninety stockholders and is not listed on any exchange, quoted on any trading market or subject to reporting requirements under the Securities Exchange Act. Consequently, Genetic MicroSystems does not need to make any filings under the Securities Exchange Act or any stock exchange with respect to the merger. 52 63 THE MERGER AGREEMENT The following describes certain aspects of the proposed merger, including material provisions of the merger agreement. The following description of the merger agreement does not purport to be complete and is subject to, and qualified in its entirety by reference to, the merger agreement, which is attached as Appendix A to this document and is incorporated in this document by reference. All Genetic MicroSystems stockholders are urged to read the merger agreement carefully and in its entirety. INTRODUCTION The merger agreement provides, among other things, for a merger of Genetic MicroSystems with and into GMS Acquisition, Inc., a wholly owned subsidiary of Affymetrix. The transaction is intended to qualify as a "pooling-of-interests" for accounting and financial reporting purposes and is intended to qualify as a tax-free "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code for federal income tax purposes. CLOSING AND EFFECTIVE TIME OF THE MERGER CLOSING The closing of the merger will take place on the later of: - January 14, 2000 or such earlier date as selected by Affymetrix; or - the first business day on which all closing conditions have been satisfied or waived or such other time as agreed to in writing by Affymetrix and Genetic MicroSystems. Alternatively, the merger may take place at such other time as Affymetrix and Genetic MicroSystems may agree in writing. The closing is expected to take place shortly after the approval of the merger by the Genetic MicroSystems stockholders. EFFECTIVE TIME The merger will be effective upon the filing articles of merger with the Secretary of State of the Commonwealth of Massachusetts, unless such articles of merger specify a later effective date, in which case the merger will be effective on such later date. We anticipate that such filing will be made simultaneously with, or as soon as practicable after, the closing of the merger. See "The Merger Agreement -- Conditions to the Merger" on page 55. EXCHANGE OF STOCK CERTIFICATES GENETIC MICROSYSTEMS STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARD AND SHOULD NOT SURRENDER STOCK CERTIFICATES PRIOR TO THE ADOPTION OF THE MERGER AGREEMENT AND THE RECEIPT OF A TRANSMITTAL FORM. FRACTIONAL SHARES No fractional shares of Affymetrix common stock will be issued to any Genetic MicroSystems stockholder in connection with the merger. Each Genetic MicroSystems stockholder who would otherwise have been entitled to receive a fraction of a share of Affymetrix common stock will receive cash, without interest, in an amount equal to such stockholder's proportionate interest in the net 53 64 proceeds from the sale by the exchange agent on behalf of all such stockholders of the aggregate fractional shares of Affymetrix common stock that such stockholders otherwise would be entitled to receive. EXCHANGE PROCEDURES Promptly after the effective time, transmittal forms and exchange instructions will be mailed to each holder of record of Genetic MicroSystems common or convertible preferred stock to be used to surrender and exchange certificates formerly evidencing shares of Genetic MicroSystems common or convertible preferred stock for certificates evidencing the shares of Affymetrix common stock and any other distributions and cash in lieu of fractional shares to which such holder has become entitled. After receiving such transmittal forms, each holder of Genetic MicroSystems common or convertible preferred stock certificates will be able to surrender such certificates to the exchange agent. Each certificate surrendered shall be canceled, and each such holder will receive in exchange therefor certificates evidencing the number of whole shares of Affymetrix common stock to which such holder is entitled, any cash which may be payable in lieu of a fractional share of Affymetrix common stock and any dividends or other distributions with respect to Affymetrix common stock with a record date at or after the effective time of the merger. DIVIDENDS AND DISTRIBUTIONS All shares of Affymetrix common stock to be issued pursuant to the merger shall be deemed issued and outstanding as of the effective time of the merger. Whenever a dividend or other distribution is declared in respect of Affymetrix common stock, and the record date for such dividend or distribution is at or after the effective time of the merger, that declaration shall include dividends or other distributions in respect of all shares of Affymetrix common stock issuable pursuant to the merger agreement. No dividends or other distributions in respect of the Affymetrix common stock shall be paid to any holder of any unsurrendered certificate formerly representing Genetic MicroSystems common or convertible preferred stock until the certificate is surrendered for exchange. EXCHANGE AND CANCELLATION OF GENETIC MICROSYSTEMS STOCK OPTIONS At the effective time, automatically and without any action on the part of the holder thereof, each outstanding Genetic MicroSystems stock option, whether vested or unvested, shall be deemed to constitute an option to acquire, on substantially the same terms and conditions as were applicable under such Genetic MicroSystems stock option, the same number of shares of Affymetrix common stock as the holder of such Genetic MicroSystems stock option would have been entitled to receive pursuant to the merger had such holder exercised such option in full immediately prior to the effective time of the merger, at an exercise price per share equal to the aggregate exercise price for the common stock otherwise purchasable pursuant to such Genetic MicroSystems stock option divided by the number of full shares of Affymetrix common stock deemed purchasable pursuant to such Genetic MicroSystems stock option. EXCHANGE OF GENETIC MICROSYSTEMS WARRANTS Pursuant to the terms of the merger agreement and certain outstanding warrants to purchase Genetic MicroSystems convertible preferred stock, at the effective time, automatically and without any action on the part of the holder thereof, certain outstanding warrants to purchase Genetic MicroSystems convertible preferred stock will be deemed to constitute warrants to acquire, on substantially the same terms and conditions as were applicable under the Genetic MicroSystems warrants, the same number of shares of Affymetrix common stock the holder of such Genetic 54 65 MicroSystems warrant would have been entitled to receive pursuant to the merger agreement had such holder exercised such Genetic MicroSystems warrant in full immediately prior to the effective time of the merger. CONDITIONS TO THE MERGER CONDITIONS TO EACH PARTY'S OBLIGATIONS The respective obligations of Genetic MicroSystems, Affymetrix and GMS Acquisition to effect the merger are subject to the satisfaction or waiver, at or prior to the effective time of the merger, of each of the following conditions: - STOCKHOLDER APPROVAL. The merger agreement shall have been approved by vote (i) of the holders of two-thirds of the shares of Genetic MicroSystems common stock outstanding and entitled to vote as of the record date for the special meeting, (ii) of the holders of two-thirds of the shares of Genetic MicroSystems convertible preferred stock outstanding and entitled to vote as of the record date for the special meeting, (iii) of the holders of a majority of the shares of Genetic MicroSystems Series A convertible preferred stock outstanding and entitled to vote as of the record date for the special meeting and (iv) of Affymetrix as sole stockholder of GMS Acquisition. The affirmative vote of a majority of the shares of Genetic MicroSystems Series A convertible preferred stock outstanding and entitled to vote as of the record date for the special meeting shall have been obtained to the effect that the merger does not constitute a liquidation, dissolution or winding up of Genetic MicroSystems; - NASDAQ QUOTATION. The appropriate notification form for quotation of Affymetrix common stock to be issued in the merger shall have been filed with the NASDAQ and the applicable fee shall have been paid by Affymetrix; - HART-SCOTT-RODINO ACT. The waiting period applicable to the consummation of the merger under the Hart-Scott-Rodino Antitrust Improvements Act shall have expired or been terminated and, other than the filing of the articles of merger, all notices other filings required to be made prior to the effective time with, and all consents, permits and authorizations required to be obtained prior to the effective time from, any governmental entity in connection with the execution and delivery of the merger agreement and the consummation of the merger shall have been made or obtained; - LITIGATION. No court or governmental entity of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, law, ordinance, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) that is in effect and restrains, enjoins or otherwise prohibits consummation of the merger or the other transactions contemplated by the merger agreement (collectively, an "Order"), and no governmental entity or any other Person shall have instituted any proceeding or threatened to institute any proceeding seeking any such Order; - ACCOUNTANT LETTER. Affymetrix and Genetic MicroSystems shall have received a letter, dated as of the closing date, from Ernst & Young LLP regarding the appropriateness of pooling-of-interests accounting for the merger under Accounting Principles Board Opinion No. 16 if the merger is closed and consummated in accordance with the merger agreement; - S-4 REGISTRATION STATEMENT. The registration statement of which this document is a part shall have become effective under the Securities Act. No stop order suspending the effectiveness of the registration statement shall have been issued, and no proceedings for that purpose shall have been initiated or threatened, by the Securities and Exchange Commission; and 55 66 - TAX OPINIONS. Affymetrix and Genetic MicroSystems shall each have received substantially identical written opinions from their counsel, Sullivan & Cromwell and Palmer & Dodge LLP, respectively, dated the closing date, to the effect that the merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code, and that each of Affymetrix, GMS Acquisition, Inc. and Genetic MicroSystems will be a party to that reorganization within the meaning of Section 368(b) of the Code. ADDITIONAL CONDITIONS TO AFFYMETRIX' OBLIGATIONS The obligations of Affymetrix and GMS Acquisition, Inc. to effect the merger are also subject to the satisfaction or waiver by Affymetrix at or prior to the effective time of the merger of the following additional conditions: - REPRESENTATIONS AND WARRANTIES. The representations and warranties of Genetic MicroSystems, the stockholders set forth on the signature pages of the merger agreement, and the Stockholder Representative (on behalf of the stockholders of Genetic MicroSystems) set forth in the merger agreement being true and correct in all respects as of the date of the merger agreement and as of the closing date as though made on and as of the closing date (except to the extent any such representation or warranty speaks as of an earlier date); unless the failure of any such representation or warranty to be so true and correct, has not had or is not reasonably likely to have, a material adverse effect on Genetic MicroSystems, and Affymetrix shall have received a certificate signed on behalf of Genetic MicroSystems to such effect. - PERFORMANCE OF OBLIGATIONS OF GENETIC MICROSYSTEMS. Genetic MicroSystems shall have performed in all material respects all obligations required to be performed by it under the merger agreement at or prior to the closing date, and Affymetrix shall have received a certificate signed on behalf of Genetic MicroSystems to such effect. - CONSENTS UNDER AGREEMENTS. Genetic MicroSystems shall have obtained the consent or approval of each person whose consent or approval shall be required under any material contract to which Genetic MicroSystems is a party. - LEGAL OPINION. Affymetrix shall have received an opinion of Palmer & Dodge LLP, counsel to Genetic MicroSystems, dated the closing date, addressing certain transaction-related matters. - RESIGNATIONS. Affymetrix shall have received the resignations of each director of Genetic MicroSystems. - NONCOMPETITION AGREEMENTS. Affymetrix and/or GMS Acquisition, Inc. shall have entered into a noncompetition agreement with certain employees of Genetic MicroSystems. - AFFILIATES LETTERS. Affymetrix shall have received an affiliates letter from each person identified as an affiliate of Genetic MicroSystems. ADDITIONAL CONDITIONS TO GENETIC MICROSYSTEMS' OBLIGATIONS The obligations of Genetic MicroSystems to effect the merger is also subject to the satisfaction or waiver by Genetic MicroSystems at or prior to the effective time of the merger of the following additional conditions: - REPRESENTATIONS AND WARRANTIES. The representations and warranties of Affymetrix and GMS Acquisition, Inc. set forth in the merger agreement shall be true and correct in all respects as 56 67 of the date of the merger agreement and as of the closing date as though made on and as of the closing date (except to the extent any such representation or warranty speaks as of an earlier date); unless the failure of any such representation or warranty to be so true and correct, has not had or is not reasonable likely to have, a material adverse effect on Affymetrix, and Genetic MicroSystems shall have received a certificate signed on behalf of Affymetrix to such effect. - PERFORMANCE OF OBLIGATIONS OF AFFYMETRIX AND GMS ACQUISITION, INC. Each of Affymetrix and GMS Acquisition, Inc. shall have performed in all material respects all obligations required to be performed by it under the merger agreement at or prior to the closing date, and Genetic MicroSystems shall have received a certificate signed on behalf of Affymetrix and GMS Acquisition to such effect. - CONSENTS UNDER AGREEMENTS. Affymetrix shall have obtained the consent or approval of each person whose consent or approval shall be required in order to consummate the transactions contemplated by this Agreement under any material contract to which Affymetrix or any of its subsidiaries is a party. - LEGAL OPINION. Genetic MicroSystems shall have received an opinion of the General Counsel of Affymetrix, dated the closing date, addressing certain transaction-related matters. REPRESENTATIONS AND WARRANTIES OF AFFYMETRIX, GMS ACQUISITION, GENETIC MICROSYSTEMS, THE STOCKHOLDER REPRESENTATIVE AND CERTAIN STOCKHOLDERS OF GENETIC MICROSYSTEMS The merger agreement contains various customary representations and warranties of Affymetrix, GMS Acquisition, Inc., Genetic MicroSystems, the Stockholder Representative and Certain Stockholders of Genetic MicroSystems relating to, among other things: - corporate organization, good standing and qualification; - capital structure; - corporate power and authority to execute, deliver and perform its obligations, and to consummate the merger; - governmental consents and regulatory approvals necessary to compete the merger; - the fact that the transactions contemplated by the merger agreement will not violate Affymetrix' or Genetic MicroSystems' organizational documents, the contracts to which Affymetrix or Genetic MicroSystems is a party or any law, rule or regulation; - the absence of certain material adverse changes or events; - financial statements; - accounting and tax matters, including qualification of the merger as a "pooling-of-interests" transaction; and - brokers and finders. 57 68 In addition, the merger agreement contains additional representations and warranties of Genetic MicroSystems, the Stockholder Representative and Certain Stockholders of Genetic MicroSystems relating to, among other things: - litigation; - employee benefit plans; - compliance with applicable laws and required licenses and permits; - antitakeover statutes; - environmental matters; - tax matters; - labor matters; - insurance; - intellectual property matters; - year 2000 compliance; - title to property and leases; - contracts; - disclosure of material facts; and - books and records. CONDUCT OF THE BUSINESS OF GENETIC MICROSYSTEMS PRIOR TO THE MERGER Pursuant to the terms of the merger agreement, Genetic MicroSystems has agreed that, prior to the effective time of the merger, unless Affymetrix otherwise consents in writing and except as otherwise expressly contemplated in the merger agreement: - it will carry out its business in the ordinary and usual course, and will use its commercially reasonable best efforts to preserve its business organization substantially intact and maintain its existing relations and goodwill with customers, suppliers, distributors, creditors, lessors, employees and business associates; - it will not amend its organizational documents; - it will not split, combine or reclassify its outstanding shares of capital stock; - it will not declare, set aside or pay any dividend payable in cash, stock or other property in respect of any capital stock; - it will not repurchase, redeem or otherwise acquire any shares of its capital stock or any securities convertible into or exchangeable for any shares of its capital stock; - it will not issue, sell, pledge, dispose of or encumber any shares of, or securities convertible into or exchangeable or exercisable for, or options, warrants, calls, commitments or rights of any kind to acquire, any shares of its capital stock of any class or any voting debt or any other property or assets, with certain exceptions; 58 69 - it will not, other than in the ordinary and usual course of business, transfer, lease, license, guarantee, sell, mortgage, pledge, dispose of or encumber any other property or assets or incur or modify any material indebtedness or other liability, subject to certain exceptions; - it will not make or authorize or commit for any capital expenditures, subject to certain exceptions or, by any means, make any acquisition of, or investment in, assets or stock of any other person or entity; - it will not terminate, establish, adopt, enter into, make any new grants or awards under (except pursuant to normal advancement and promotion procedure consistent with past practice), amend or otherwise modify, any compensation and benefit plans or increase or accelerate the salary, wage, bonus or other compensation of any employees; - it will not settle or compromise any material claims or litigation or, except in the ordinary and usual course of business, modify, amend or terminate any of its material contracts or waive, release or assign any material rights or claims; - it will not make any material tax election or permit any insurance policy naming it as a beneficiary or loss-payable payee to be canceled or terminated except in the ordinary and usual course of business; - it will not, except as may be required as a result of a change in generally accepted accounting principles and in accordance with the written advice of its accountants, change any of the accounting practices or principles used by it; - it will not adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization, or other reorganization of it; - it will not take any action or omit to take any action that would cause any of its representations and warranties to become untrue in any material respect; and - it will not authorize or enter into an agreement to do any of the foregoing. NO SOLICITATION OF ACQUISITION PROPOSALS The merger agreement provides that Genetic MicroSystems and its officers and directors shall not, and that Genetic MicroSystems shall direct and use its best efforts to cause its employees and representatives and agents of Genetic MicroSystems (including any investment banker, attorney or accountant retained by Genetic MicroSystems) not to, directly or indirectly: - initiate, solicit, encourage or otherwise facilitate any inquiries or the making of any proposal or offer with respect to a merger, reorganization, share exchange, consolidation or similar transaction involving Genetic MicroSystems, or any purchase of 10% or more of the assets or any equity securities of Genetic MicroSystems (any such proposal is referred to in this document as an "acquisition proposal"); and - engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any person relating to an acquisition proposal, or otherwise facilitate any effort or attempt to make or implement an acquisition proposal. However, Genetic MicroSystems may: - provide information in response to a request therefor by a person who has made an unsolicited bona fide written acquisition proposal if Genetic MicroSystems receives from the person so requesting such information an executed confidentiality agreement, if and only to the extent 59 70 that, Genetic MicroSystems determines in good faith after consultation with outside legal counsel that such action is necessary in order for its directors to comply with their respective fiduciary duties under applicable law; - engage in any negotiations or discussions with any person who has made an unsolicited bona fide written acquisition proposal, if and only to the extent that, Genetic MicroSystems determines in good faith after consultation with outside legal counsel that such action is necessary in order for its directors to comply with their respective fiduciary duties under applicable law and Genetic MicroSystems determines in good faith (after consultation with its financial advisor) that such acquisition proposal, if accepted, is reasonably likely to be consummated, taking into account all legal, financial and regulatory aspects of the proposal and the person making the proposal and would, if consummated, result in a transaction more favorable to Genetic MicroSystems' stockholders from a financial point of view than the transaction contemplated by the merger agreement (any such more favorable acquisition proposal is referred to in this document as a "superior proposal"); and - recommend such an acquisition proposal to the stockholders of Genetic MicroSystems, if and only to the extent that, Genetic MicroSystems determines in good faith after consultation with outside legal counsel that such action is necessary in order for its directors to comply with their respective fiduciary duties under applicable law and Genetic MicroSystems determines in good faith (after consultation with its financial advisor) that such acquisition proposal is a superior proposal. The merger agreement also requires that Genetic MicroSystems: - will notify Affymetrix immediately if any such inquiries, proposals or offers are received by, any such information is requested from, or any such discussions or negotiations are sought to be initiated or continued with Genetic MicroSystems; and - indicate to Affymetrix the identity of the offeror and the terms and conditions of any such acquisition proposal and thereafter keep Affymetrix informed of the status and terms of such proposals and the status of such negotiations or discussions. ADDITIONAL COVENANTS INFORMATION SUPPLIED Affymetrix and Genetic MicroSystems have agreed that none of the information they supply for inclusion in the registration statement on Form S-4 filed with the Securities and Exchange Commission to register the common shares of Affymetrix to be issued in the merger, of which this document is a part, will contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. POOLING-OF-INTERESTS The merger agreement provides that neither Affymetrix nor Genetic MicroSystems will take or cause to be taken any action, whether before or after the effective time of the merger that would disqualify the merger as a "pooling-of-interests" for accounting purposes. For more detailed information, see "Accounting Treatment" on page 51. 60 71 OTHER AGREEMENTS The merger agreement contains additional covenants relating to the conduct of the parties prior to the merger, including among other things: - in the case of Genetic MicroSystems, to take all action necessary to convene a meeting of Genetic MicroSystems stockholders as promptly as practicable after the registration statement, of which this document is a part, is declared effective by the Securities and Exchange Commission, in order to approve the merger agreement; - to use commercially reasonable best efforts to cause to be delivered to the other party "comfort letters" from such party's independent accountants; - to use commercially reasonable best efforts to take or cause to be taken all actions, and do or cause to be done all things, necessary, proper or advisable to consummate and make effective the merger, including promptly making filings with applicable governmental entities and obtaining all necessary regulatory approvals and consents; - not to take or cause to be taken, whether before or after the effective time of the merger, any action that would disqualify the merger as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code; - in the case of Genetic MicroSystems, to afford Affymetrix reasonable access to information pertaining to Genetic MicroSystems and its business; - to deliver to the other party, no later than 10 days prior the date of the special meeting in the case of Genetic MicroSystems, and no later than the effective time of the merger in the case of Affymetrix, a list of all individuals that such party believes to be "affiliates" of such party at the time, in the case of Genetic MicroSystems, the merger agreement is submitted for approval to the Genetic MicroSystems stockholders, and in the case of Affymetrix, prior to the effective time of the merger and to use commercially reasonable best efforts to cause such persons to deliver "affiliates" letters' to the other party; - in the case of Affymetrix, to file with the NASDAQ National Market the appropriate notification form for the quotation of additional shares together with the applicable fee covering Affymetrix common stock to be issued in the merger; - in the case of Affymetrix, at the effective time of the merger, assume the Genetic MicroSystems stock option plan and reserve a sufficient number of shares of Affymetrix common stock for issuance pursuant to such options; - in the case of Affymetrix, for one year after the effective time of the merger, provide continuing Genetic MicroSystems employees benefits under employee benefit plans that are no less favorable in the aggregate than those currently provided by Genetic MicroSystems to such employees; and - in the case of Genetic MicroSystems, at the effective time of the merger, assign those noncompetition and nonsolicitation contracts that Genetic MicroSystems has entered into with its employees, as Affymetrix may request. 61 72 TERMINATION, AMENDMENT OR WAIVER TERMINATION The merger agreement may be terminated at any time prior to the closing date: - whether before or after the approval by the stockholders of Genetic MicroSystems, by the mutual written consent of Genetic MicroSystems and Affymetrix, by action of their respective boards of directors; - by either Affymetrix or Genetic MicroSystems if: - the merger is not completed by February 15, 2000, provided that the right to terminate after such date will not be available to any party that has breached in any material respect its obligations under the merger agreement in any manner that shall have proximately contributed to the occurrence of the failure of the merger to be consummated; - the requisite approval of the Genetic MicroSystems stockholders has not been obtained at a meeting duly convened for such purpose; or - any order permanently restraining, enjoining or otherwise prohibiting the merger shall become final and non-appealable. - by Genetic MicroSystems under the following circumstances: - Genetic MicroSystems is not in breach of any of the terms of the merger agreement; and - The board of directors of Genetic MicroSystems authorizes, subject to the terms of the merger agreement, Genetic MicroSystems to enter into a binding written agreement concerning a superior proposal, and Genetic MicroSystems notifies Affymetrix in writing that it intends to enter into such an agreement, attaching the most current version of such agreement to such notice; and - Affymetrix does not make, within five business days of receipt of Genetic MicroSystems' written notification of its intention to enter into such an agreement, an offer that the Genetic MicroSystems board of directors determines is at least as favorable, from a financial point of view, to the stockholders of Genetic MicroSystems as the proposal as to which Genetic MicroSystems gave notice; and - Genetic MicroSystems pays to Affymetrix, prior to such termination, in immediately available funds the termination and expense fees that are discussed below under the heading "Termination Fee and Expense Reimbursement." - if there has been a material breach by Affymetrix or GMS Acquisition of any representation, warranty, covenant or agreement of Affymetrix or GMS Acquisition contained in the merger agreement that is not curable or, if curable, is not cured within 30 days after written notice of such breach is given by Genetic MicroSystems to the party committing such breach. - - by Affymetrix if: - the Genetic MicroSystems board of directors shall have withdrawn or adversely modified its approval or recommendation of the merger agreement or failed to reconfirm its recommendation of the merger agreement within five business days after a written request by Affymetrix to do so; 62 73 - there has been a material breach by Genetic MicroSystems of any representation, warranty, covenant or agreement of Genetic MicroSystems contained in the merger agreement that is not curable or, if curable, is not cured within 30 days after written notice of such breach is given by Affymetrix to Genetic MicroSystems; or - Genetic MicroSystems or any of the other persons delineated under the heading "No Solicitation of Acquisition Proposals" takes any of the actions that are proscribed by the covenant described under the heading "No Solicitation of Acquisition Proposals." Neither Affymetrix nor Genetic MicroSystems may terminate the merger agreement or elect not to complete the merger solely because of changes in the price of shares of Affymetrix common stock. TERMINATION FEE AND EXPENSE REIMBURSEMENT Genetic MicroSystems has agreed to pay to Affymetrix a termination fee equal to $2,500,000 and to reimburse Affymetrix' expenses up to $1,000,000 if the merger agreement is terminated under the following circumstances: - Genetic MicroSystems terminates the merger agreement because: - Genetic MicroSystems is not in breach of any of the terms of the merger agreement; and - The board of directors of Genetic MicroSystems authorizes, subject to the terms of the merger agreement, Genetic MicroSystems to enter into a binding written agreement concerning a superior proposal, and Genetic MicroSystems notifies Affymetrix in writing that it intends to enter into such an agreement, attaching the most current version of such agreement to such notice; and - Affymetrix does not make, within five business days of receipt of Genetic MicroSystems' written notification of its intention to enter into such an agreement, an offer that the Genetic MicroSystems board of directors determines is at least as favorable, from a financial point of view, to the stockholders of Genetic MicroSystems as the proposal as to which Genetic MicroSystems gave notice. - Affymetrix terminates the merger agreement because: - the Genetic MicroSystems board of directors (in connection with a superior proposal) has withdrawn or adversely modified its approval or recommendation of the merger agreement or failed to reconfirm its recommendation of the merger agreement within five business days after a written request by Affymetrix to do so; or - Genetic MicroSystems or any of the other persons delineated under the heading "No Solicitation of Acquisition Proposals" takes any of the actions that are proscribed by the covenant described under the heading "No Solicitation of Acquisition Proposals." APPOINTMENT OF STOCKHOLDER REPRESENTATIVE Pursuant to the terms of the merger agreement, each holder of shares of Genetic MicroSystems capital stock who votes in favor of the merger or who receives or accepts shares of Affymetrix common stock as the merger consideration will be deemed to have consented to the appointment of Jean Montagu as stockholder representative and will be deemed to have consented to the performance by the stockholder representative of all rights and obligations conferred on the stockholder representative under the merger agreement and the escrow agreement. The stockholder representative is indemnified by the stockholders of Genetic MicroSystems for losses and liabilities 63 74 incurred without gross negligence or bad faith on the part of the stockholder representive. For more detailed information on the escrow arrangements, see "Escrow Agreement" on page 68. INDEMNIFICATION AND LIABILITY OBLIGATIONS GENERAL Pursuant to the terms of the merger agreement and the escrow agreement, 10% of the aggregate number of shares of Affymetrix common stock to be delivered by Affymetrix at the closing of the merger will be deposited on a pro-rata per stockholder basis with an escrow agent, for a period not to exceed one year, for purposes of indemnifying Affymetrix. For more detailed information on the escrow arrangements, see "Escrow Agreement" on page 68. For a period of one year after the effective time of the merger, the stockholders of Genetic MicroSystems will jointly and severally indemnify and hold harmless Affymetrix and its affiliates, for, and shall pay to Affymetrix and its affiliates the amount of, any damages directly or indirectly arising or resulting from or in connection with: - any breach of any representation or warranty made by Genetic MicroSystems, the stockholders of Genetic MicroSystems set forth on the signature pages of the merger agreement or the stockholder representative in the merger agreement or in any certificate delivered by Genetic MicroSystems pursuant to the merger agreement; - any breach by Genetic MicroSystems of any covenant or obligation of Genetic MicroSystems in the merger agreement; or - any breach of, or failure to assign to Affymetrix or any affiliate of Affymetrix all of the rights under and terms of, any contract to which Genetic MicroSystems is a party directly or indirectly arising or resulting from or in connection with Genetic MicroSystems' ceasing to exist by virtue of the merger. For a period of one year after the effective time of the merger, Affymetrix will indemnify and hold harmless the stockholders of Genetic MicroSystems, and shall pay to such stockholders the amount of any damages arising, directly or indirectly, from or in connection with: - any breach of any representation or warranty made by Affymetrix in the merger agreement or in any certificate delivered by Affymetrix pursuant to the merger agreement; or - any breach by Affymetrix of any covenant or obligation of Affymetrix in the merger agreement. LIMITATIONS ON INDEMNIFICATION Genetic MicroSystems stockholders will not have liability for indemnification as provided by the indemnification procedures in the merger agreement: - unless and until the total amount of all damages with respect to such matters, taken together, exceeds $500,000, in which case Affymetrix will be entitled to indemnification for the entire amount its damages; and - for any damages in the aggregate in excess of the 10% escrowed shares of Affymetrix common stock; These limitations will not apply to any breach of Genetic MicroSystems' representations and warranties of which Genetic MicroSystems had knowledge at any time prior to the date on which 64 75 such representation and warranty is made or any intentional breach by Genetic MicroSystems of any covenant or obligation. Affymetrix will not have liability for indemnification or otherwise: - unless and until the total amount of all damages with respect to such matters, taken together, exceeds $500,000, in which case Genetic MicroSystems stockholders will be entitled to indemnification for the entire amount of their damages; and - for any damages in the aggregate in excess of an amount equal to 535,000 multiplied by the closing price on the NASDAQ of the shares of Affymetrix common stock on the closing date; These limitations will not apply to any breach of Affymetrix' representations and warranties of which Affymetrix had knowledge at any time prior to the date on which such representation and warranty is made or any intentional breach by Affymetrix of any covenant or obligation. NON-EXCLUSIVE REMEDY The indemnification provisions of the merger agreement are not the exclusive remedy for Affymetrix. Affymetrix will have the right to recover damages from the Genetic MicroSystems stockholders pursuant to a judgment from any court of competent jurisdiction for damages directly or indirectly arising or resulting from or in connection with: - any breach of any representation or warranty made by Genetic MicroSystems, the stockholders of Genetic MicroSystems set forth on the signature pages of the merger agreement or the stockholder representative in the merger agreement or in any certificate delivered by Genetic MicroSystems pursuant to the merger agreement; - any breach by Genetic MicroSystems of any covenant or obligation of Genetic MicroSystems in the merger agreement; or - any breach of, or failure to assign to Affymetrix or any affiliate of Affymetrix all of the rights under and terms of, any contract to which Genetic MicroSystems is a party directly or indirectly arising or resulting from or in connection with Genetic MicroSystems' ceasing to exist by virtue of the merger. However, Genetic MicroSystems stockholders will not have liability for any damages in the aggregate in excess of the amount equal to 535,000 multiplied by the closing price on the NASDAQ of the shares of Affymetrix common stock on the closing date. AMENDMENT Subject to the provisions of applicable law, at any time prior to the effective time of the merger, the parties to the merger agreement may modify or amend the merger agreement, by written agreement executed and delivered by duly authorized officers of such parties. WAIVER The conditions to each party's obligation to consummate the merger are for the sole benefit of such party and may be waived by such party in whole or in part to the extent permitted by law. At any time prior to the effective time of the merger, any party to the merger agreement may extend in writing the time for the performance of any of the obligations or other acts of any other party to the merger agreement or waive in writing compliance with any of the agreements of any other party or any conditions to its own obligations, to the extent such obligations, agreements and conditions are intended for its benefit and to the extent permitted by law. 65 76 STOCK OPTION AGREEMENT As a condition and inducement to Affymetrix' entering into the merger agreement, Genetic MicroSystems granted to Affymetrix an option to purchase shares of its common stock up to 19.9% of its currently outstanding capital stock pursuant to a stock option agreement that was entered into on September 10, 1999. The following describes certain aspects of the stock option agreement, including material provisions of the stock option agreement. The following description of the stock option agreement does not purport to be complete and is subject to, and qualified in its entirety by reference to, the stock option agreement, which is attached as Appendix B to this document and is incorporated in this document by reference. All Genetic MicroSystems stockholders are urged to read the stock option agreement carefully and in its entirety. TERMS OF THE OPTION NUMBER OF SHARES AND EXERCISE PRICE Under the stock option agreement, Genetic MicroSystems has granted to Affymetrix an option to purchase shares of its common stock up to 19.9% of the outstanding capital stock of Genetic MicroSystems at an exercise price per share equal to $21.50. In the event of any change in the number of issued and outstanding shares of capital stock of Genetic MicroSystems (by reason of any stock dividend, stock split, split-up, recapitalization, merger, issuance of capital stock upon exercise of warrants or options or any other event), the number of shares subject to the stock option and the purchase price per share shall be appropriately adjusted to restore Affymetrix to fully preserve the economic benefits provided under the stock option agreement. EXERCISE RIGHTS Affymetrix may exercise the stock option if: - any of the three triggering events described in the first paragraph under "Termination Fee and Expense Reimbursement" occurs; or - Genetic MicroSystems notifies Affymetrix that it has received a superior proposal and Affymetrix notifies Genetic MicroSystems that it does not intend to match such acquisition proposal. CASH-OUT RIGHT The stock option agreement further provides that at any time the option is exercisable, Affymetrix may elect to exercise its "Cash-Out Right." This right allows Affymetrix to require Genetic MicroSystems to pay to Affymetrix an amount in cash in exchange for the cancellation of the option with respect to such number of shares as Affymetrix specifies. This cash amount is equal to such number of shares multiplied by the difference between the highest price per share of Genetic MicroSystems common stock paid or proposed to be paid by any person pursuant to an acquisition proposal and $21.50. 66 77 EXPIRATION To the extent the stock option has not been exercised, the stock option agreement will expire upon the earliest of: - the effective time of the merger; - twelve months after the date of termination of the merger agreement pursuant to a superior proposal which is not met by Affymetrix or a withdrawal or adverse modification or by the Genetic MicroSystems board of its recommendation of the merger; and - thirty days following the termination or the merger agreement for any reason other than those described above. REPURCHASE AT THE OPTION OF GENETIC MICROSYSTEMS Pursuant to the stock option agreement, Genetic MicroSystems has the right to repurchase any shares of Genetic MicroSystems common stock purchased by Affymetrix pursuant to the stock option for a period of 180 days after each date on which the stock option is exercised. The price per share Genetic MicroSystems will pay upon a repurchase event is equal to the purchase price paid by Affymetrix. LIMITATION OF PROFIT Affymetrix' total profit under the stock option agreement together with the amount of any termination and expense fee paid by Genetic MicroSystems to Affymetrix pursuant to the merger agreement shall in no event exceed $5,000,000. EFFECT OF STOCK OPTION AGREEMENT The stock option agreement increases the likelihood that the merger will be consummated in accordance with the terms of the merger agreement. The stock option agreement would have the effect of making an acquisition or other combination of Genetic MicroSystems by or with a third party more costly because of the need in any such transaction to acquire, account for or pay the price of the stock option shares that would be issued under the stock option agreement. Affymetrix and Genetic MicroSystems also believe that the exercise of the stock option could prohibit any other acquiror of Genetic MicroSystems during the next two years from accounting for any such acquisition by using the pooling-of-interests accounting method. Accordingly, the stock option agreement may discourage a third party who might be interested in effecting such an acquisition or combination from considering or proposing the transaction or may cause such third party to offer to pay a lower price than such party would have proposed if pooling-of-interest accounting were available. In addition, Affymetrix would have a significant stake in Genetic MicroSystems if it exercised the stock option and held the stock. 67 78 ESCROW AGREEMENT The following describes certain aspects of the escrow agreement, including material provisions of the escrow agreement. The following description of the escrow agreement does not purport to be complete and is subject to, and qualified in its entirety by reference to, the escrow agreement, which is attached as Appendix C to this document and is incorporated in this document by reference. All Genetic MicroSystems stockholders are urged to read the escrow agreement carefully and in its entirety. Pursuant to the terms of the escrow agreement, Affymetrix will deposit 10% of the aggregate merger consideration on a pro-rata per stockholder basis, for a period not to exceed one year, with Bank One Trust Company, NA, as escrow agent. The shares of Affymetrix common stock are reserved for the purpose of satisfying the indemnification obligations owed to Affymetrix by Jean Montagu, who will serve as stockholder representative under the escrow agreement, and the other stockholders of Genetic MicroSystems. Five business days after the one-year anniversary of the effective date of the merger, shares of Affymetrix common stock that have not been used to satisfy claims will be will be distributed by the escrow agent to the stockholders of Genetic MicroSystems pro rata in accordance with the relative ownership percentage of each stockholder. The escrow agreement also provides that Affymetrix can instruct the escrow agent not to distribute the escrowed shares until any unsatisfied indemnification claim has been resolved. Affymetrix must pay to the escrow agent any cash or stock dividends and other distributions with respect to the shares of Affymetrix common stock held in the escrow account. The escrow agent will only retain in the escrow account any dividends and distributions declared by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of Affymetrix common stock. All other cash or stock dividends on the shares of Affymetrix common stock will be distributed to the stockholders of Genetic MicroSystems in accordance with the relative ownership percentage of each stockholder. If Affymetrix believes it is entitled to payment for an indemnification claim, it must file a certificate signed by its president or any of its vice-presidents stating that claim. Unless the stockholder representative objects within fifteen business days after the escrow agent and stockholder representative received that certificate, the escrow agent will pay Affymetrix' claim on the fifteenth business day after its receipt of Affymetrix' certificate. On that day, the escrow agent will deliver to Affymetrix that number of shares of Affymetrix stock equal to the amount obtained by dividing the amount sought under the indemnity by the closing price on the NASDAQ National Market of Affymetrix stock on the closing date of the merger. If the stockholder representative objects in a timely manner as detailed in the escrow agreement, the parties will endeavor in good faith to agree on the amount that Affymetrix is entitled to recover from the escrow account or have that amount determined by a court of competent jurisdiction. Jean Montagu, as stockholder representative, will not receive a fee for his services. He may resign on thirty days written notice to the parties to the escrow agreement, or he may be removed by the stockholders of Genetic MicroSystems. The stockholder representative is indemnified by the stockholders of Genetic MicroSystems for losses and liabilities incurred without gross negligence or bad faith on the part of the stockholder representative. Under the escrow agreement, no action may be taken or omitted to the extent that such action or omission would result in the merger not qualifying for pooling-of-interests accounting treatment. 68 79 STOCKHOLDER VOTING AGREEMENTS As a condition and inducement to Affymetrix' entering into the merger agreement, Affymetrix entered into stockholder voting agreements with the following six stockholders of Genetic MicroSystems: - Jean Montagu, the Chairman of the board of directors, Chief Executive Officer and founder of Genetic MicroSystems; - Dominic Montagu, family member of the Chairman of the board of directors, Chief Executive Officer and founder of Genetic MicroSystems; - Sasha Montagu, family member of the Chairman of the board of directors, Chief Executive Officer and founder of Genetic MicroSystems; - Stanley Rose, executive officer -- Chief Operating Officer of Genetic MicroSystems; - Peter Honkanen, executive officer -- Vice President of Engineering of Genetic MicroSystems; and - Myles L. Mace, Jr., executive officer -- Vice President of Technology Developments of Genetic MicroSystems. The following description sets forth certain aspects of the stockholder voting agreements, including material provisions of the stockholder voting agreements. The following description of the stockholder voting agreements does not purport to be complete and is subject to, and qualified in its entirety by reference to, the form of stockholder voting agreement, which is attached as Appendix D to this document and is incorporated herein by reference. GENERAL On September 10, 1999, contemporaneously with the execution and delivery of the merger agreement, Affymetrix and the six stockholders listed above entered into stockholder voting agreements pursuant to which each such stockholder agreed, among other things: - to vote all of the shares of Genetic MicroSystems over which the stockholder has voting power in favor of the merger agreement and the merger and any other transaction contemplated by the merger agreement; and - to vote all of the shares of Genetic MicroSystems over which the stockholder has voting power against (i) any proposal that would constitute an acquisition proposal, (ii) any amendment to the organizational documents of Genetic MicroSystems and (iii) any other amendment, proposal or transaction involving Genetic MicroSystems, which amendment or other proposal or transaction would in any manner impede, frustrate, prevent or nullify the merger or which is reasonably likely to result in any of the conditions to Genetic MicroSystems' obligations under the merger agreement not being fulfilled; and - to grant to Affymetrix, an irrevocable proxy, or, if applicable, a power of attorney, and to irrevocably appoint Affymetrix, its attorney and proxy to vote all of the shares of Genetic MicroSystems over which the stockholder has voting power with respect to approval of the merger agreement at any meeting of the stockholders of Genetic MicroSystems. Massachusetts law requires that the merger agreement be approved by the affirmative vote of two-thirds of the shares of each class of stock of Genetic MicroSystems. Together, the six stockholders listed above beneficially own and have voting control over approximately 69.5% of the 69 80 shares of Genetic MicroSystems common stock and approximately 72% of the shares of Genetic MicroSystems convertible preferred stock. Therefore, their shares represent more than the number of votes necessary to adopt the merger agreement and approve the merger. TERMINATION The stockholder voting agreements provide that they will terminate upon the earlier of: - the effective time of the merger; or - the termination of the merger agreement. STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS Information concerning current directors and officers of Affymetrix, executive compensation and ownership of Affymetrix common stock by management and principal stockholders is contained in Affymetrix' Proxy Statement, dated May 5, 1999, and is incorporated in this document by reference. See "Where You Can Find More Information" on page 94. Genetic MicroSystems is a privately held corporation with fewer than ninety stockholders and has no reporting obligation under the Securities Exchange Act of 1934, as amended, or the rules and regulations of any exchange. The table on the following page sets forth beneficial ownership of Genetic MicroSystems' capital stock as of September 30, 1999 by: - each person or entity known to Genetic MicroSystems to beneficially own 5% or more of the outstanding shares of each class of Genetic MicroSystems' capital stock; - each of Genetic MicroSystems' directors; - Genetic MicroSystems' Chief Executive Officer and each of the other four most highly compensated executive officers of Genetic MicroSystems whose salary and bonus was greater than $100,000 in 1998; and - all directors and executive officers of Genetic MicroSystems as a group. 70 81
SHARES OF SERIES A SHARES OF SERIES B PERCENT OF SHARES OF COMMON CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED OUTSTANDING STOCK BENEFICIALLY STOCK BENEFICIALLY STOCK BENEFICIALLY CAPITAL OWNED (1) OWNED(1) OWNED(1) STOCK(2) ---------------------- ---------------------- ---------------------- ------------ NUMBER OF PERCENT OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF PERCENT OF BENEFICIAL OWNER SHARES CLASS SHARES CLASS SHARES CLASS TOTAL SHARES - ---------------- --------- ---------- --------- ---------- --------- ---------- ------------ Jean Montagu................ -- -- 1,500,000 75.00% 36,400(3) 8.43% 44.68% Stanley D. Rose............. 300,000 29.80% 50,000(4) 2.44% 43,197(4) 9.09% 11.13% Peter Honkanen.............. 300,000 29.80% -- -- 25,000(4) 5.47% 9.38% Myles L. Mace, Jr........... 100,000 9.93% 50,000 2.50% -- -- 4.36% Dominic D. Montagu.......... -- -- 100,000(5) 5.00% 14,260(6) 3.30% 3.32% 823 Mendecino Ave. Berkeley, CA 94707 John N. Williams............ -- -- 100,000 5.00% -- -- 2.91% 84 Commonwealth Ave #4 Boston, MA 02118 Sasha Montagu............... -- -- 100,000 5.00% -- -- 2.91% P.O. Box 962 Whitefish, MT 59939 L. Robert Johnson........... 50,000 4.97% 50,000(7) 2.50% -- -- 2.91% Stewart H. Greenfield....... -- -- 100,000 5.00% -- -- 2.91% 274 Sturges Hwy. Westport, CT 06880 Gottlieb Knoch.............. -- -- -- -- 35,294 8.17% 1.03% Taegerhalde 3 Ch-8700 Unsnacht, Switzerland Jane L. Glassco............. -- -- -- -- 29,411 6.81% * 754 Euclid Avenue Toronto, Ontario Canada MGG 2V4 Andre Citroen............... -- -- -- -- 24,000 5.56% * 10 Green Street London, WIY 3RF United Kingdom All current executive officers and directors as a group (8 persons)....... 815,833(8) 79.01% 1,650,000(9) 80.49% 104,597(10) 20.91% 71.75%
- ------------------------- * Indicates less than 1% (1) Unless otherwise indicated, each stockholder has sole voting and investment power with respect to the shares listed in the table. The applicable percentage ownership for each stockholder of each class of capital stock of Genetic MicroSystems, as shown in this column, is based on (1) 1,006,702 shares of common stock, (2) 2,000,000 shares of Series A convertible preferred stock, and (3) 431,977 shares of Series B convertible preferred stock of Genetic MicroSystems outstanding as of September 30, 1999, plus any shares subject to options or warrants held by the stockholder in question that are currently exercisable or exercisable within 60 days after September 30, 1999. Although the Series A convertible preferred stock and Series B convertible preferred stock is convertible into common stock, it is not reflected on an as-converted basis in the common stock column because, as a voting security, it is reflected in its own column. (2) The applicable percentage ownership for each stockholder, as shown in this column, is based on an aggregate amount of 3,438,679 shares of Genetic MicroSystems capital stock outstanding as of September 30, 1999, plus 71 82 any shares subject to options or warrants held by the stockholder in question that are currently exercisable or exercisable within 60 days after September 30, 1999. The common stock, Series A convertible preferred stock and Series B convertible preferred stock vote together as a single class except as required by law or under Genetic MicroSystems' restated articles of organization. The merger is treated as a liquidation unless the holders of a majority of Series A convertible preferred stock, voting as a single class, elect not to treat it as a liquidation. (3) Jean Montagu shares voting and investment power with his wife with respect to the shares of Series B preferred stock held by Jean Montagu. (4) Represents shares that may be required within 60 days after September 30, 1999 upon the exercise of outstanding warrants. (5) Consists of shares owned by Dominic Montagu and his wife in a trust for the benefit of their children, as to which Dominic Montagu disclaims beneficial ownership. (6) Includes 14,260 shares of Series B convertible preferred stock owned by or in trust for members of the immediate family of one stockholder, who disclaims beneficial ownership thereof. (7) L. Robert Johnson shares voting and investment power with his wife with respect to the shares of Series A convertible preferred stock held by L. Robert Johnson. (8) Includes 25,833 shares issuable upon exercise of outstanding stock options exercisable within 60 days after September 30, 1999. (9) Includes 50,000 shares issuable upon exercise of outstanding warrants exercisable within 60 days after September 30, 1999. (10) Includes 68,197 shares issuable upon exercise of outstanding warrants exercisable within 60 days after September 30, 1999. INTERESTS OF CERTAIN PERSONS IN THE MERGER In considering the recommendation of the Genetic MicroSystems board with respect to the merger agreement and the transactions contemplated by the merger agreement, stockholders of Genetic MicroSystems should be aware that certain members of the management and board of directors of Genetic MicroSystems have certain interests in the merger that are different from, or in addition to, the interests of stockholders of Genetic MicroSystems generally. All such interests are described below, to the extent material, and Genetic MicroSystems believes that, except as described below, such persons do not have any material interest in the merger that is different from those of Genetic MicroSystems stockholders generally. The Genetic MicroSystems board was aware of, and considered the interests of, its directors and officers when it approved the merger agreement and the merger. STOCK OWNERSHIP As of September 30, 1999, the directors and executive officers of Genetic MicroSystems beneficially owned approximately 815,833 shares of Genetic MicroSystems common stock, including 25,833 shares issuable upon exercise of outstanding stock options exercisable within 60 days after September 30, 1999, 1,650,000 shares of Genetic MicroSystems Series A convertible preferred stock, including 50,000 shares issuable upon exercise of outstanding warrants exercisable within 60 days after September 30, 1999, and 104,597 shares of Genetic MicroSystems Series B convertible preferred stock, including 68,197 shares issuable upon exercise of outstanding warrants exercisable within 60 days after September 30, 1999. The directors and executive officers of Genetic MicroSystems will receive the same consideration in connection with the merger as other holders of 72 83 Genetic MicroSystems common stock and options, Series A convertible preferred stock and warrants, and Series B convertible preferred stock and warrants, respectively. NON-COMPETITION AGREEMENTS As a condition to closing the merger, certain senior executives of Genetic MicroSystems will enter into non-competition agreements with Affymetrix prior to the effective time of the merger. The terms of these agreements have not yet been agreed to, but these agreements will likely contain provisions whereby these individuals agree that: - for a period of time after the end of their employment by Affymetrix they will not directly or indirectly participate in a business or activity that competes with the business of Affymetrix or Genetic MicroSystems; - they will keep confidential commercially valuable information of Affymetrix; and - during the time they are employed by Affymetrix and for a period of time thereafter they will not directly or indirectly solicit employees of Affymetrix to leave the employ of Affymetrix, hire any former employee of Affymetrix within twelve months of the end of their employment with Affymetrix, solicit business from customers of Affymetrix, interfere with Affymetrix' relationship with any other person or disparage Affymetrix, its affiliates or employees. These individuals will not receive any consideration for entering into the non-competition agreements other than the Affymetrix stock issued to them in the merger. 1998 STOCK PLAN As of September 30, 1999, the directors and executive officers of Genetic MicroSystems held stock options or warrants exercisable within 60 days after September 30, 1999, to purchase 25,833 shares of Genetic MicroSystems common stock, 50,000 shares of Genetic MicroSystems Series A convertible preferred stock, and 68,197 shares of Genetic MicroSystems Series B convertible preferred stock. At the effective time of the merger, each option and warrant (including the stock options and warrants held by Genetic MicroSystems executive officers and directors) will convert into an option or warrant to acquire the number of shares of Affymetrix common stock that the holder would have received in the merger if the holder had exercised the option or warrant in full immediately prior to the closing of the merger and the exercise price will be adjusted appropriately. The number of shares of Affymetrix common stock that the new Affymetrix option or warrant will be exercisable for and the exercise price of the new Affymetrix option or warrant will reflect the exchange ratio. Affymetrix has agreed to file with the Securities and Exchange Commission, not later than 60 days after the closing of the merger, a registration statement on Form S-8 or other appropriate form under the Securities Act of 1933, as amended, to register the shares of Affymetrix common stock issuable upon exercise of the options of Affymetrix exchanged for Genetic MicroSystems options. EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS On May 19, 1998, Genetic MicroSystems entered into an executive severance agreement with Peter Lewis, Chief Financial Officer of Genetic MicroSystems. The severance agreement provides that if within one year of a "change of control," Mr. Lewis' employment is terminated without 73 84 "cause," as defined in the severance agreement, or if Mr. Lewis terminates his employment for "good reason," as defined in the severance agreement, Mr. Lewis will become entitled to: - receive severance compensation equal to the amount of his base salary at the time of termination, and - will be eligible to continue to participate in all benefit plans he was entitled to receive before such termination. The merger constitutes a "change of control" under Mr. Lewis' severance agreement. RESTRICTED STOCK AGREEMENTS Genetic MicroSystems has entered into restricted stock agreements with the following directors and officers of Genetic MicroSystems: - Peter Honkanen - Peter Lewis - L. Robert Johnson Under the terms of the restricted stock purchase agreements, some or all of the shares of Genetic MicroSystems common stock held by these individuals are subject to repurchase by Genetic MicroSystems in the event that the individual's employment or involvement with Genetic MicroSystems is terminated. The restricted stock purchase agreements provide that upon an "acquisition event," the number of shares of Genetic MicroSystems common stock then subject to repurchase by Genetic MicroSystems will become fully vested and released from any repurchase right by Genetic MicroSystems. Genetic MicroSystems and Affymetrix believe that the merger constitutes an acquisition event of Genetic MicroSystems for purposes of the restricted stock agreements. Upon approval of the merger, the vesting will be accelerated to the extent provided for in the restricted stock agreements. On September 30, 1999, the above listed persons held a total of 380,000 shares of Genetic MicroSystems common stock. OWNERSHIP AND VOTING OF STOCK As of September 30, 1999, directors and executive officers of Genetic MicroSystems and their affiliates may be deemed to have beneficial ownership of approximately 79.01% of the outstanding shares of Genetic MicroSystems common stock including outstanding stock options exercisable within 60 days after September 30, 1999, approximately 80.49% of the shares of outstanding Series A convertible preferred stock including outstanding warrants exercisable within 60 days after September 30, 1999, and approximately 20.91% of the outstanding shares of Series B convertible preferred stock including outstanding warrants exercisable within 60 days after September 30, 1999. These directors and executive officers may be deemed to have beneficial ownership either by themselves or with others. Certain of the directors and executive officers of Genetic MicroSystems and/or their affiliates have agreed in stockholder voting agreements with Affymetrix to vote all of the outstanding shares of Genetic MicroSystems stock, over which they have voting control, to be voted in favor of adoption of the merger agreement. For more detailed information concerning the stockholder voting agreements, see "Stockholder Voting Agreements" on page 69. 74 85 GENETIC MICROSYSTEMS MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Genetic MicroSystems was incorporated on August 7, 1997 to develop, manufacture and sell a new generation of enabling products for genomics research and drug discovery. Genetic MicroSystems was a development-stage company until the commencement of substantial operations in 1998. IMPACT OF YEAR 2000 Genetic MicroSystems is assessing the potential impact of the year 2000 computer issues with regards to its systems and other aspects of its operations dependent upon automation or computerized operation. Genetic MicroSystems has initiated the assessment process and is expected to complete the project by year end. The assessment will also include an analysis of certain third party suppliers. Expenditures to date have not been material and are not expected to be material based upon the information gathered to date. While Genetic MicroSystems believes that the year 2000 issue will not pose significant operational problems for its computer systems or other critically dependent equipment, certain contingency plans may be developed in an attempt to minimize the potential disruption on business, should an issue be identified. RESULTS OF OPERATIONS SIX MONTHS ENDED JULY 3, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 Revenues for the first six months of 1999 were $5,081,572 as compared to no revenue in the previous year's comparable period. The increase in revenue was due to growing demand for arrayer and array scanner products which Genetic MicroSystems began to ship during the fourth quarter of 1998. Genetic MicroSystems' gross margin for the period was $1,928,481 or 38.0 % of revenues. This percentage was negatively impacted by inefficiencies associated with the start-up of manufacturing and a mix of market seeding units at low average unit price. Total selling, general and administrative expenses were $1,984,137 for the first six months of 1999 versus $705,615 in the previous period. The growth in expense is a function of building out of the infrastructure of Genetic MicroSystems and the hiring of a direct sales force. Direct sales headcount was 8 as of July 3, 1999 as compared to zero in the previous period. Research and development expenses, for the first six months of 1999 were $1,381,309, a growth of 29% over the $1,070,532 of spending in 1998. The increase was primarily due to a continued expansion of the research and development staff. During the period Genetic MicroSystems recorded $64,387 of net interest income compared with $17,975 in the previous period. The growth in interest income was a function of the larger cash equivalents position in 1999 as a result of a Series B preferred stock equity offering in December of 1998 and January of 1999. A loss on the sale of securities of $664,505 was recorded in the six months ended June 30, 1998. Genetic MicroSystems did not record any income tax benefit related to its losses in 1999, given the uncertainty regarding its ability to generate taxable income in future year. The income tax benefit of $808,411 recorded during the 6 months ended June 30, 1998, reflects the income tax benefit associated with losses generated during 1998 which were used to offset income generated from the sale of available for sale securities. 75 86 The net loss and comprehensive net loss for the six months ended July 3, 1999 was $1,372,578 or $(1.36) per basic and diluted share. This compares with a $1,614,266 net loss and a $972,489 comprehensive net loss in the comparable period of 1998. The difference between the net loss and comprehensive net loss in 1998 was due to the unrealized gains on available for sale securities during the 6 months ended June 30, 1998. During 1998 Genetic MicroSystems sold all of its investment securities. The net loss per basic and diluted share was $(10.35) and the comprehensive net loss per basic and diluted share was $ (6.24) for the six months ended June 30. 1998. YEAR ENDED DECEMBER 31, 1998 COMPARED TO PERIOD FROM INCEPTION (AUGUST 7, 1997) TO DECEMBER 31, 1997 Revenues for 1998 were $387,605 versus no revenue in the previous year's comparable period. The increase in revenue was due to the initial demand for arrayer and array scanner products which Genetic MicroSystems began to ship in the fourth quarter of 1998. Genetic MicroSystems' gross margin for the period was $20,000 or 5.2% of revenues. This percentage was negatively impacted by inefficiencies associated with the start-up of manufacturing. Total selling general and administrative expenses were $1,877,541 for 1998 versus $59,159 in the previous period. The growth in expense is a function of building out of the infrastructure of Genetic MicroSystems. Research and development expenses for 1998 were $2,479,915 compared to $421,694 of spending in 1997. The increase was primarily due to a continued expansion of the research and development staff as well as a full year of operations. During the period Genetic MicroSystems recorded $63,172 of net interest income compared with none in the previous period. The growth in interest income was a function of the larger cash equivalents position in 1998 as a result of Genetic MicroSystems' sale of available for sale securities and proceeds from the sale of Series A preferred stock. A loss on the sale of securities of $ (664,505) was recorded in the year ended December 31, 1998. The income tax benefit of $1,268,616 recorded during 1998, reflects the income tax benefit associated with losses generated during 1998 which were used to offset income generated from the sale of available for sale securities. The net loss for the year ended December 31, 1998 was $(3,670,173) and the comprehensive net loss was $(3,028,396). This compares with a $(253,771) net loss and a $(895,548) comprehensive net loss in the comparable period of 1998. For the year ended December 31, 1998, the net loss per basic and diluted share was $(6.21) and the comprehensive net loss per basic and diluted share was $(5.12). This compares to a net loss per basic and diluted share of $(25.38) and the comprehensive net loss per basic and diluted share of $(89.55) for the 1997 period. FINANCIAL CONDITION Since inception Genetic MicroSystems has financed its operations and growth through the contributions of the founder in the form of equity securities, the sale of Series A and Series B preferred stock and the sale of common stock purchase rights to Takara Shuzo, a strategic partner. In the first six months of 1999, Genetic MicroSystems used $2,311,930 of cash in operating activities due primarily to the loss from operations as well as the increase in accounts receivable and inventories as shipments commenced. The completion of the Series B preferred stock offering in January 1999 generated $709,184 of cash, more than offsetting the capital expenditures of $237,685 in 1999. 76 87 At July 3, 1999, Genetic MicroSystems had $2,526,577 of cash and cash equivalents. Genetic MicroSystems believes that these capital resources are sufficient to finance operations and capital expenditures through the end of the year. Genetic MicroSystems also believes that it currently has the potential to access sufficient additional capital resources to finance operations and capital expenditures for the next 12 months. A deterioration in the business prospects of Genetic MicroSystems or the financial markets, among other things, could adversely affect the ability of Genetic MicroSystems to access additional capital. 77 88 DESCRIPTION OF AFFYMETRIX CAPITAL STOCK The following summary is a description of the material terms of Affymetrix capital stock, does not purport to be complete and is subject in all respects to the applicable provisions of the Delaware General Corporation Law, Affymetrix' certificate of incorporation and Affymetrix' bylaws, all of which are on file with the SEC. AUTHORIZED CAPITAL STOCK Affymetrix' authorized capital stock consists of 75,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share, of which 1,634,522 are designated Series AA preferred stock. PREFERRED STOCK As of October 13, 1999, no shares of Series AA preferred stock were issued and outstanding. Pursuant to the Affymetrix rights agreement referred to below, Affymetrix may designate a series of preferred securities entitled "Series B Junior Participating Preferred Stock" for issuance upon the exercise of the rights distributed to holders of Affymetrix stock pursuant to the Affymetrix rights agreement. See "Description of the Capital Stock -- Rights Agreement" on page 81. SERIES AA PREFERRED STOCK DESIGNATION AND AMOUNT. The authorized number of shares of Series AA preferred stock, par value $0.01 per share, is 1,634,522. No shares of Series AA preferred stock are currently outstanding. RANK. With respect to dividend rights and rights on liquidation, dissolution and winding-up, the Series AA preferred stock ranks senior to Affymetrix common stock and are subject to the rights of any series of preferred stock that may from time to time come into existence. DIVIDENDS. The holders of Series AA preferred stock are entitled to receive cumulative dividends payable in cash prior and in preference to any dividends paid to holders of common stock at the rate of $1.99 (as adjusted for any stock splits, stock dividends, combinations, recapitalizations, or the like with respect to Series AA preferred stock) per share payable in two equal installments on June 30 and December 31 of each year. These dividends accrue on each share of Series AA preferred stock whether or not earned or declared from the date on which the Series AA preferred stock was first issued. Holders of Series AA preferred stock are also entitled to receive an amount equal to any cash dividend paid to holders of common stock. LIQUIDATION RIGHTS. In the event of a liquidation, dissolution or winding up of Affymetrix, each holder of Series AA preferred stock is entitled to receive a liquidation preference prior and in preference to any payments made to holders of common stock. This preference is an amount per share equal to the sum of: - $30.59 for each outstanding share of Series AA preferred stock; - accrued but unpaid dividends on each share of Series AA preferred stock; and - a per share amount equal to the difference obtained by subtracting: - the product of ten percent of the annual per share dividend multiplied by a fraction, the numerator of which is the number of days elapsed since the date on which the first share of Series AA preferred stock was first issued and the denominator of which is 365, from 78 89 - the annual per share dividend. After the payment, holders of Affymetrix common stock are entitled to receive an amount per share equal to the quotient obtained by dividing: - the per share Series AA preferred stock liquidation preference by - the number of shares of common stock into which one share of Series AA preferred stock could then be converted. Any remaining assets would be distributed ratably to the holder of Affymetrix common stock and holders of Series AA preferred stock. REDEMPTION. Series AA preferred stock can be redeemed at the election of Affymetrix or at the election of the holders of the Series AA preferred stock. Redemption at the Option of Affymetrix Subject to the rights of series of preferred stock that may from time to time come into existence: - On or prior to March 9, 2001, Affymetrix may, at the option of the board of directors, redeem in whole or in part the Series AA preferred stock by paying in cash a sum equal to: - $30.59, as adjusted for any stock splits, stock dividends, combinations, recapitalizations or the like, plus - accrued but unpaid dividends on such share; provided that the closing sale price of this Affymetrix' common stock on the NASDAQ National Market, or any other national securities exchange on which the common stock is then listed, has been at or above $52.00, as adjusted for any stock splits, stock dividends, combinations, recapitalizations or the like, for twenty of thirty consecutive trading days prior to the applicable redemption date. - After March 9, 2001, Affymetrix may, at the option of the board of directors, redeem in whole or in part the Series AA preferred stock by paying in cash a sum equal to the Series AA liquidation preference described above. These redemptions will be made on a pro rata basis among the holders of the Series AA preferred stock in proportion to the number of shares of Series AA preferred stock then held, and each holder of Series AA preferred stock may, at any time after notice by the corporation of its intention to redeem shares and up to two trading days prior to the redemption, convert shares of Series AA preferred stock into shares of Affymetrix common stock pursuant to the conversion procedures described below. If Affymetrix has insufficient funds to redeem all outstanding Series AA preferred stock, it must immediately redeem the remaining shares of Series AA preferred stock as soon as funds become legally available to effect the redemption. REDEMPTION AT THE OPTION OF THE STOCKHOLDERS Subject to the rights of series of preferred stock that may from time to time come into existence, at any time on or after March 9, 2005, the holders of not less than a majority of the then outstanding Series AA preferred stock can request that a specified percentage of the holders' shares of Series AA preferred stock be redeemed. Concurrently with surrender by the holders of the certificates representing the shares, Affymetrix will, to the extent it may lawfully do so, redeem the number of shares specified in the request on a pro rata basis among the holders of the Series AA preferred stock 79 90 in proportion to the number of shares of Series AA preferred stock proposed to be redeemed. Affymetrix will pay in cash a redemption price equal to: - $30.59 per share of Series AA preferred stock, as adjusted for any stock splits, stock dividends, recapitalizations or the like, plus - accrued but unpaid dividends on that share. Affymetrix, however, is not required to redeem more than 817,261 shares of Series AA preferred stock, as adjusted for any stock splits, stock dividends, recapitalizations or the like, during any twelve-month period. If Affymetrix has insufficient funds to redeem all outstanding Series AA preferred stock, it must immediately redeem the remaining shares of Series AA preferred stock as soon as funds become legally available to effect the redemption. CONVERSION RIGHTS. Each share of Series AA preferred stock is convertible into Affymetrix common stock at the option of the holder of the shares from the time of issuance up to two days prior to an announced redemption date. Upon an election to convert, that holder's shares of Series AA preferred stock will be converted into that number of shares of Affymetrix common stock equal to: - $30.59, as ratably adjusted for any stock splits, stock dividends, combinations, recapitalizations or the like with respect to Series AA preferred stock, divided by - $39.77, as ratably adjusted for any stock splits, stock dividends, combinations, recapitalizations or the like with respect to Affymetrix common stock. OTHER DISTRIBUTIONS. If Affymetrix declares a distribution payable in securities of another company, evidences of indebtedness, assets excluding cash, or other options or rights, the holders of Series AA preferred stock are entitled to a proportionate share of that distribution as though they were holders of the number of shares of Affymetrix common stock into which their Series AA preferred stock is convertible. RECAPITALIZATION. If the Affymetrix common stock is recapitalized, the holders of Series AA preferred stock are entitled to receive, upon conversion of their Series AA preferred stock to Affymetrix common stock, a number of shares of Affymetrix common stock or other securities or property to which they would have been entitled had they converted prior to the recapitalization. VOTING RIGHTS. The holder of each share of Series AA preferred stock has the right to one vote for each share of common stock into which the Series AA preferred stock could then be converted at the record date for determination of the stockholders entitled to vote. With respect to that vote, the holder will have full voting rights and powers equal to the voting rights and powers of the holders of common stock, and are entitled, notwithstanding any provision in Affymetrix' charter, to notice of any stockholders' meeting in accordance with Affymetrix' bylaws, and will be entitled to vote, together with holders of common stock, with respect to any question upon which holders of common stock have the right to vote and otherwise as required by law. Fractional votes will not, however, be permitted and any fractional voting rights available on an as-converted basis, after aggregating all shares into which shares of Series AA preferred stock held by each holder could be converted, will be rounded to the nearest whole number, with one-half being rounded upward. OTHER SERIES OF PREFERRED STOCK Affymetrix' board is authorized to issue shares of preferred stock, in one or more series, and to fix for each series the rights, privileges, preferences and restrictions, including dividend rights, conversion rights, voting terms, terms of redemption, liquidation preferences, and the number of 80 91 shares constituting any series or the designation of series, as are permitted by the Delaware General Corporation Law. As of the date hereof, no shares of any other series of Affymetrix preferred stock are outstanding. Pursuant to the Affymetrix rights agreement referred to below, Affymetrix may designate a series of preferred securities entitled "Series B Junior Participating Preferred Stock" for issuance upon the exercise of the rights distributed to holders of Affymetrix stock pursuant to the Affymetrix rights agreement. See "Description of the Capital Stock -- Rights Agreement" on this page. COMMON STOCK As of October 12, 1999, approximately 25,759,524 shares of Affymetrix common stock were outstanding. In addition, no shares of Affymetrix common stock were held in the treasury of Affymetrix and 4,133,612 shares of Affymetrix were reserved for issuance pursuant to Affymetrix' employee benefit plans. Immediately following the merger, we expect approximately -- shares of Affymetrix common stock will be outstanding and approximately -- shares of Affymetrix common stock will be reserved for issuance pursuant to Affymetrix' employee benefit plans. The holders of Affymetrix common stock are entitled to receive ratably, from funds legally available for the payment, dividends when and as declared by resolution of the Affymetrix board, subject to any preferential dividend rights which may be granted to holders of any preferred stock authorized and issued by the Affymetrix board. Affymetrix will not be able to pay any dividend or make any distribution of assets on shares of common stock until dividends on shares of Affymetrix Series AA preferred stock and on any other shares of Affymetrix preferred stock then outstanding with dividend or distribution rights senior to the common stock have been paid. In the event of a liquidation, dissolution or winding up of Affymetrix, each share of Affymetrix common stock is entitled to receive, after payment of liabilities and, after payment of a liquidation preference to the holders of Series AA preferred stock, an amount per share equal to the quotient obtained by dividing the per share Series AA preferred stock liquidation preference by the number of shares of common stock into which one share of Series AA preferred stock could then be converted. After this payment, any remaining assets would be distributed ratably to the holders of Affymetrix common stock and holders of Affymetrix Series AA preferred stock. Each holder of Affymetrix common stock is entitled to one vote for each share of Affymetrix common stock held of record on the applicable record date on all matters submitted to a vote of stockholders, including the election of directors. Holders of Affymetrix common stock have no preemptive or conversion rights or other subscription rights. No redemption or sinking fund provisions apply to Affymetrix common stock. The outstanding shares of Affymetrix common stock are, and the shares of Affymetrix common stock issued in connection with the merger will be, duly authorized, validly issued, fully paid and nonassessable. American Stock Transfer & Trust Company is the transfer agent and registrar for Affymetrix common stock. RIGHTS AGREEMENT On October 15, 1998, the board of directors of Affymetrix declared a dividend of one right to purchase Series B Junior Participating Preferred Stock of Affymetrix, par value $0.01 per share, for each outstanding share of common stock of Affymetrix and a number of rights for each share of Series AA preferred stock of Affymetrix equal to the number of shares of common stock of Affymetrix into which such share of Series AA preferred stock was convertible on October 27, 1998. Each right entitles the holder to purchase from Affymetrix one-thousandth of a share of Series B 81 92 Junior Participating Preferred Stock, at an exercise price of $125.00 per one one-thousandth of a share of Series B Junior Participating Preferred Stock, subject to adjustment. The description and terms of the rights are set forth in a rights agreement, dated as of October 15, 1998, between Affymetrix and American Stock Transfer & Trust Company, as rights agent. The rights are initially represented only by the underlying certificates of Affymetrix common stock or Series AA preferred stock, as the case may be, and do not trade separately from the common stock or the Series AA preferred stock unless and until the earlier of: - ten days following a public announcement that a person or group of affiliated or associated persons, otherwise known as acquiring persons, has acquired beneficial ownership of 15% or more in aggregate voting power of the outstanding shares of Affymetrix common stock and Series AA preferred stock; or - ten business days, or such later date as the board of directors of Affymetrix may fix by resolution, after the date a person or group commences, or announces an intention to make, a tender or exchange offer that would result in such person or group becoming the beneficial owners of 15% or more of the aggregate voting power of the outstanding shares of Affymetrix common stock and Series AA preferred stock. The purchase price payable, and the number of shares of Series B Junior Participating Preferred Stock issuable upon exercise of the rights is subject to adjustment from time to time to prevent dilution. Because of the nature of the Series B Junior Participating Preferred Stock's dividend, liquidation and voting rights, the value of each 1/1000 of a share of Series B Junior Participating Preferred Stock would have economic and voting terms equivalent to one share of Affymetrix common stock. In the event that any person or group either acquires or may acquire 15% of the aggregate voting power of the Affymetrix common stock and Series AA preferred stock, the rights attached to this person or group's shares and the rights attached to shares they beneficially own become void. Each other holder of a right will have the right to receive upon exercise of a right that number of shares of Affymetrix common stock having a market value of two times the exercise price of the right. In the event that, after a person or group has become an acquiring person of 15% or more of the voting power of Affymetrix, Affymetrix is acquired in a merger or similar form of business combination or the acquisition by such acquiring person of 50% or more in aggregate voting power of the outstanding shares of Affymetrix common stock and Series AA preferred stock, each holder of a right, other than rights beneficially owned by an acquiring person which have become void, will thereafter have the ability to exercise each right for that number of shares of common stock of that acquiring person equal to two times the market value of the exercise price. At any time after any person or group becomes an acquiring person and prior to a merger or similar form of business combination or the acquisition by an acquiring person of 50% or more in aggregate voting power of the outstanding shares of Affymetrix common stock and Series AA preferred stock, the Affymetrix board may exchange the rights, other than rights owned by acquiring person which have become void, in whole or in part, for shares of Affymetrix common stock, Series B Junior Participating Preferred Stock, or a series of Affymetrix' preferred stock having equivalent rights, preferences and privileges, at an exchange ratio of one share of Affymetrix common stock, or a fractional share of Series B Junior Participating Preferred Stock (or other preferred stock) of equivalent value, per right. 82 93 Shares of Series B Junior Participating Preferred Stock purchasable upon exercise of the rights will not be redeemable. Each share of Series B Junior Participating Preferred Stock will be entitled, when, as and if declared, to a minimum preferential quarterly dividend payment of the greater of: - $10 per share, and - an amount equal to one-thousandth of the dividend declared per share of Affymetrix common stock. In the event of liquidation, dissolution or winding up of Affymetrix, the holders of the Series B Junior Participating Preferred Stock will be entitled to a minimum preferential payment of the greater of: - $10 per share (plus any accrued but unpaid dividends); or - an amount equal to one thousandth of the liquidation payment made per share of Affymetrix common stock. Each share of Series B Junior Participating Preferred Stock will have one-thousand votes, voting together with the Affymetrix common stock. Finally, in the event of any merger, consolidation or other transaction in which outstanding shares of Affymetrix common stock are converted or exchanged, each share of Series B Junior Participating Preferred Stock will be entitled to receive one-thousand times the amount received per share of Affymetrix common stock. The rights expire on October 15, 2008, unless this expiration date is advanced or extended or unless the rights are earlier redeemed or exchanged by Affymetrix. Prior to the time that a person becomes an acquiring person, Affymetrix may redeem the rights in whole, but not in part, for $0.01 per right, or it may amend the rights agreement in any manner without the consent of the holders of the rights. After the rights are no longer redeemable, however, Affymetrix may, except with respect to the redemption price, amend the rights agreement in any manner that does not adversely affect the interests of holders of the rights. The rights will not prevent a takeover of Affymetrix. The rights, however, may cause substantial dilution to a person or group that acquires 15% or more of the common stock unless the rights are first redeemed by the Affymetrix board of directors. Until a right is exercised or exchanged, the holder thereof, as such, will have no rights as an Affymetrix stockholder, including, without limitation, the right to vote or to receive dividends. A copy of the rights agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A, dated October 16, 1998. A description of the rights is available free of charge from Affymetrix, see "Where You Can Get More Information" on page 94. This summary description of the rights does not purport to be complete and is qualified in its entirety by reference to the description of the rights contained in the Registration Statement on Form 8-A, dated October 16, 1998, which is hereby incorporated into this document by reference. 83 94 COMPARISON OF STOCKHOLDER RIGHTS As a result of the merger, holders of Genetic MicroSystems stock will become holders of Affymetrix common stock. The following is a summary of certain material differences between the rights of holders of Genetic MicroSystems convertible preferred stock and common stock and the rights of holders of Affymetrix common stock. The rights of Genetic MicroSystems stockholders are currently governed by Genetic MicroSystems' articles of organization and bylaws and applicable provisions of the Massachusetts Business Corporation Law. Affymetrix' stockholders' rights are currently governed by Affymetrix' certificate of incorporation and bylaws and applicable provisions of the Delaware General Corporation Law. The following summary highlights important similarities and differences between the rights of current holders of Affymetrix common stock and current holders of Genetic MicroSystems stock. This summary does not purport to be a complete discussion of the charters and bylaws of Genetic MicroSystems and Affymetrix or the corporation laws of Massachusetts or Delaware. The discussion of the Affymetrix charter and bylaws is qualified in its entirety by reference to the Affymetrix charter and bylaws, copies of which are on file with the Securities and Exchange Commission. The articles of Genetic MicroSystems are publicly available from the Secretary of State of the Commonwealth of Massachusetts. AUTHORIZED CAPITAL STOCK
AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- Affymetrix' charter authorizes Genetic MicroSystems' articles authorize Affymetrix to issue 80,000,000 shares of Genetic MicroSystems to issue 7,636,353 capital stock, of which: shares of capital stock, of which: - - 75,000,000 shares are designated common - 5,000,000 shares are designated common stock, $0.01 par value per share; and stock, no par value; and - - 5,000,000 shares are designated - 2,636,353 shares are designated preferred stock, $0.01 par value per preferred stock, $0.01 par value per share; including 1,634,522 shares of share; consisting of 2,054,000 shares of Series AA preferred stock, $0.01 par Series A convertible preferred stock, value per share. Pursuant to the $0.01 par value per share, and 582,353 Affymetrix rights agreement referred to shares of Series B convertible preferred above, Affymetrix may designate a series stock, $0.01 par value per share. of preferred securities entitled "Series B Junior Participating Preferred Stock" for issuance upon the exercise of the rights distributed to holders of Affymetrix stock pursuant to the Affymetrix rights agreement. See "Description of the Capital Stock -- Rights Agreement" on page 81.
PREFERRED STOCK
AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- Affymetrix' board of directors is Genetic MicroSystems preferred stock may authorized to issue shares of preferred be issued from time to time in one or more stock in one or more
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AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- series, and to fix for each series the series. The board may determine and fix designations and relative powers, voting powers, full, limited or no voting preferences, conversion or other rights, powers, and such designations, preferences voting powers, restrictions, limitations and relative participating, optional or as to dividends, qualifications, or terms other special rights, and qualifications, or conditions of redemption, as are limitations or restrictions thereof, permitted by the Delaware General including without limitation, dividend Corporation Law. To date, no shares of any rights, special voting rights, conversion series of Affymetrix preferred stock other rights, redemption privileges and than Series AA preferred stock are liquidation preferences, as shall be authorized. Pursuant to the Affymetrix stated and expressed in resolutions all to rights agreement referred to below, the full extent permitted by the Affymetrix may designate a series of Massachusetts Business Corporation Law. preferred securities entitled "Series B The resolutions providing for issuance of Participating Preferred Stock" for any series of preferred stock may provide issuance upon the exercise of the rights that a new series is superior or rank distributed to holders of Affymetrix stock equally or be junior to the preferred pursuant to the Affymetrix rights stock of any other series to the extent agreement. See "Description of the Capital permitted by the Massachusetts Business Stock" beginning on page 78. Corporation Law. Except as otherwise provided by Genetic MicroSystems, no vote of the holders of the Genetic MicroSystems preferred stock or Genetic MicroSystems common stock is a prerequisite to the issuance of any shares of any series of the preferred stock.
DIVIDENDS
AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- Delaware Law: Corporations generally Massachusetts Law: Corporations generally are permitted to declare and pay dividends are permitted to pay dividends if the out of surplus or out of net profits for action is not taken when the corporation the current and/or immediately preceding is insolvent, does not render the fiscal year, provided that dividends will corporation insolvent, and does not not reduce capital below the amount of violate the corporation's articles of capital represented by all classes of organization. The directors of a stock having a preference upon the Massachusetts corporation may be jointly distribution of assets. A corporation may and severally liable to the corporation to generally redeem or repurchase shares of the extent that the directors authorize a its stock if the redemption or repurchase dividend when the corporation is insolvent will not impair the capital of a or where the amount of the dividend corporation. The directors of a Delaware exceeds the permissible amounts and is not corporation may be jointly and severally repaid to the corporation. liable to the corporation for a willful or negligent violation of these provisions of Delaware law. Affymetrix common stock: Subject to Genetic MicroSystems common stock: Genetic all the rights of the preferred stock, MicroSystems' articles provide that except as may be expressly provided with dividends may be declared and paid on the respect to the preferred stock, by law or Genetic MicroSystems common stock from by the board pursuant to Paragraph 5(1)(a) funds lawfully available as determined by of Article FIFTH of the charter, dividends the board of directors. Dividends paid to may be declared and paid or set apart for holders of Genetic MicroSystems common payment upon the Affymetrix stock are
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AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- common stock only out of any assets or subject to any preferential dividend funds of Affymetrix legally available for rights of any then outstanding Genetic the payment of dividends. MicroSystems preferred stock. Genetic MicroSystems preferred stock: During any fiscal year of the corporation, no dividends (other than dividends payable solely in shares of Genetic MicroSystems common stock) shall be paid or declared, and no other distributions shall be made, on or with respect to the Genetic MicroSystems common stock with one exception. Unless and until there shall have been paid, or declared and set aside for payment, during the fiscal year dividends with respect to each share of Series A convertible preferred stock in an amount equivalent to the amount per share to be paid as a dividend on the Genetic MicroSystems common stock, such equivalent amount payable in respect of each share of Series A convertible preferred stock will be determined by multiplying the amount per share of the dividend to be paid on the common stock by the number of shares of common stock into which each such share of Series A convertible preferred stock and convertible at the record date for the determination of stockholders entitled to the payment of such dividend.
VOTING RIGHTS
AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- Affymetrix common stock: Holders are Genetic MicroSystems common stock: Holders entitled to one vote for each share held are entitled to one vote for each share at all meetings of stockholders (and held at all meetings of stockholders (and written actions in lieu of meetings). written actions in lieu of meetings). There is no cumulative voting. There is no cumulative voting. Genetic MicroSystems preferred stock: On all matters submitted to a vote of holders of Genetic MicroSystems common stock generally, each share of Series A convertible preferred stock or Series B convertible preferred stock will have the right to exercise the number of votes equal to the number of shares of common stock into which such share of Series A convertible preferred stock or Series B convertible preferred stock could be converted on the record date for determining stockholders having a right to vote
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AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- on such matters, and, except as required by law, the Series A convertible preferred stock, the Series B convertible preferred stock and the Genetic MicroSystems common stock will vote as a single class.
MEETINGS OF STOCKHOLDERS
AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- Affymetrix' charter and bylaws Genetic MicroSystems' bylaws provide for provide that special meetings of the call of a special meeting at any time stockholders, other than those required by by the President or a majority of the statute, may be called only by the directors. Special meetings shall be Chairman of the Board or the President or called by the Clerk, or in the case of his by the board of directors acting pursuant death, absence, incapacity or refusal, by to a resolution adopted by a majority of any other officer, upon written the total number of authorized directors application of one or more stockholders whether or not there exist any vacancies who hold at least one- tenth part in in previously authorized directorships. interest of the capital stock entitled to vote at such meeting, stating the time, place and purpose of the meeting. Affymetrix' bylaws provide that an The annual meeting of stockholders shall annual meeting of the stockholders, for be held within six months after the end of the election of directors to succeed those Genetic MicroSystems' fiscal year whose terms expire and for the transaction specified in the bylaws, at such date, of such other business as may properly hour and place as are fixed by the board come before the meeting, shall be held at of directors or the president. At such 11 a.m. on the first Tuesday of the fifth annual meeting the stockholders shall calendar month following the end of the elect directors, hear the report of the corporation's fiscal year or at such time treasurer, and transact such other as the board of directors shall each year business as may properly come before the fix, which date shall be within 13 months meeting. In the event that no date for the of the last annual meeting of the annual meeting is established or if no stockholders. annual meeting is held in accordance with the foregoing procedures, a special meeting of the stockholders may be held in lieu of and for the purposes of the annual meeting with all the force and effect of an annual meeting and for such other purposes as may be specified in the notice of that special meeting.
ACTION BY STOCKHOLDERS WITHOUT A MEETING
AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- Unless otherwise provided in the Under Massachusetts law, any action to be certificate of incorporation, Delaware law taken by stockholders may be taken without permits stockholders to take action a meeting only by unanimous written without a meeting, without prior notice consent, and a corporation may not provide and without a vote, upon the written otherwise in its articles of organization consent of stockholders having not less or bylaws. than the minimum number of votes that
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AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- would be necessary to authorize the proposed action at a meeting at which all shares entitled to vote were present and voted. Affymetrix' charter provides that any Pursuant to the Genetic MicroSystems action required or permitted to be taken bylaws, any action required or permitted by the stockholders of the corporation to be taken by stockholders at a meeting must be effected at a duly called annual may be taken without a meeting if all or special meeting of stockholders of the stockholders entitled to vote on the corporation and may not be effected by any matter consent to the action in writing consent in writing by such stockholders. and the written consents are filed with the records of the meetings of stockholders.
BOARD OF DIRECTORS
AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- Affymetrix currently has nine Genetic MicroSystems currently has four directors. directors. The authorized number of directors The Genetic MicroSystems board of cannot be less than six nor more than directors consists of not less than three eleven. Within these limits, the exact nor more than fifteen directors, except number of directors is set at nine. An that whenever there are only two indefinite number of directors may be stockholders, the Genetic MicroSystems fixed, or the definite number of directors board of directors may consist of at may be changed, by a duly adopted least, but not be less than, two amendment to the charter or by an directors, and whenever there is only one amendment to the bylaws duly adopted by stockholder or prior to the issuance of the stockholders or Affymetrix board of any stock, the board may consist of at directors. least, but not less than, one director. Whenever the authorized number of The directors generally hold office until directors is increased between annual the next annual meeting of stockholders or meetings of the stockholders, a majority directors at which they are regularly of the directors then in office have the elected and until their successors are power to elect such new directors for the chosen and qualified. balance of a term and until their successors are elected and qualified. Any decrease in the authorized number of directors does not become effective until the expiration of the term of the directors then in office unless, at the time of that decrease, there are vacancies on the board of directors which are being eliminated by the decrease. Subject to applicable law and to the When there is a vacancy in the Genetic rights of holders of any series of MicroSystems board of directors, including preferred stock with respect to that a vacancy resulting from the enlargement series of preferred stock, and unless the of the board, the Genetic MicroSystems Affymetrix board of directors otherwise board of directors may fill that vacancy determines, vacancies on the board of by the affirmative vote of a majority of directors (including without limitation the directors then in office. vacancies
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AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- resulting from death, resignation, Any vacancy in the Genetic MicroSystems retirement, disqualification from office board of directors may also be filled by or other cause) are filled only by a the stockholders at any regular or special majority vote of the directors then in meeting unless that vacancy has been office, though less than a quorum, and previously filled by the Genetic directors so chosen will hold office for MicroSystems board of directors. Any the unexpired term and until his or her director so elected by the Genetic successor is duly elected or qualified. No MicroSystems board of directors or decrease in the number of authorized stockholders to fill such vacancy will directors constituting the entire hold office only until the next meeting of Affymetrix board of directors shortens the the stockholders or directors at which the term of any incumbent director. office would regularly be filled and until a successor is chosen and qualified. The board of directors is elected at The Genetic MicroSystems board of each annual meeting of the Stockholders. directors is elected at each annual meeting of the stockholders. Except as summarized above, the exact number of directors constituting the board is fixed at each annual meeting by the stockholders, provided that by vote of the stockholders at a special meeting called for the purpose the number of directors may be increased or decreased and provided further that by vote of a majority of the directors then in office, the number of directors may be increased. No vacancy shall be deemed to exist in the board unless and until the number of directors in office falls below the number so fixed. At any meeting of the board of At any meeting of the Genetic MicroSystems directors, a majority of the total number board of directors, a majority, or if the of the whole Affymetrix board of directors number of directors is an even number, constitutes a quorum for all purposes. If then one-half, of the directors then in there is not a quorum at the meeting, a office constitutes a quorum. majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. The Affymetrix charter gives the The Genetic MicroSystems articles and Affymetrix board of directors broad bylaws give the Genetic MicroSystems authority, including authority to fix the directors broad powers, including the compensation of the directors. The power to fix any fees or other directors may be paid their expenses, if compensation paid to directors and members any, of attendance at each meeting of the of the Genetic MicroSystems executive board of directors or paid a stated salary committee and any other committees, if or paid other compensation as director. No any, for their services to Genetic such payment shall preclude any director MicroSystems as the board may deem from serving the corporation in any other reasonable. capacity and receiving compensation therefor.
89 100 INDEMNIFICATION OF DIRECTORS AND OFFICERS
AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- Under Delaware law, a director is not Under Massachusetts law, a director is exculpated from liability under provisions generally not exculpated from liability of the Delaware General Corporation Law under provisions of the Massachusetts relating to unlawful payments of dividends Business Corporation Law relating to and unlawful stock purchases or unauthorized distributions and loans to redemptions. insiders. Delaware General Corporation Law The Massachusetts Business Corporation Law generally permits indemnification, or provides that no indemnification may be reimbursement, of directors and officers provided with respect to any matter in for expenses, judgments, fines and amounts which the director or officer shall have paid in settlement of claims incurred by been adjudicated not to have acted in good them by reason of their position with the faith in the reasonable belief that his corporation. action was: The Delaware General Corporation Law - in the best interest of the corporation, permits indemnification only where there or has been a determination by a majority vote of disinterested directors, - to the extent that such matter relates independent legal counsel, or the to service with respect to any employee stockholders that the person seeking benefit plan, in the best interests of indemnification acted in good faith and in the participants or beneficiaries of a manner he or she reasonably believed to such employee benefit plan. be in, or not opposed to, the best interests of the corporation. The Delaware General Corporation Law The Massachusetts Business Corporation Law expressly does not permit a corporation to does not explicitly address indemnifying indemnify persons against judgments in persons against judgments in actions actions brought by or in the right of the brought by or in the right of the corporation (although it does permit corporation. The previously discussed indemnification in such situations if standard applies to such cases. approved by the Delaware Court of Chancery and for expenses of such actions). Affymetrix' charter provides that, to Genetic MicroSystems' articles provide the fullest extent permitted by Delaware that no director of the corporation shall General Corporation Law, a director of the be personally liable to the corporation or corporation shall not be personally liable its stockholders for monetary damages for to the corporation or its stockholders for breach of fiduciary duty as a director monetary damages for breach of fiduciary notwithstanding any provision of law duty as a director, except for liability: imposing such liability; provided, however, that this provision shall not - - for any breach of the director's duty of eliminate or limit the liability of a loyalty to the corporation or its director, to the extent that such stockholders; liability is imposed by applicable law: - - for acts or omissions not in good faith - for any breach of the director's duty of or which involve intentional misconduct loyalty to the corporation or its or a knowing violation of law; stockholders; - - under Section 174 of the Delaware - for acts or omissions not in good faith General Corporation Law; or or which involve intentional misconduct or a knowing violation of law;
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AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- - - for any transaction from which the - under Section 61 or 62 or successor director derived an improper personal provisions of the Massachusetts Business benefit. Corporation Law; or - for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation No amendment to or repeal of this Law is amended to authorize corporate provision of the Genetic MicroSystems action further eliminating or limiting the articles shall apply to or have any effect personal liability of directors, then the on the liability or alleged liability of liability of a director of the corporation any director for or with respect to any shall be eliminated or limited to the acts or omissions of such director fullest extent permitted by the Delaware occurring prior to such amendment or General Corporation Law, as amended. repeal.
AMENDMENT OF CHARTER AND BYLAWS
AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- Affymetrix' charter provides that the Genetic MicroSystems' articles authorize Affymetrix board of directors is expressly the Genetic MicroSystems board of empowered to adopt, alter, amend or repeal directors to make, amend or repeal the bylaws of the corporation. Any adoption, bylaws to the extent permitted by law. alteration, amendment or repeal of the Genetic MicroSystems' bylaws provide that bylaws of the corporation by the they may be amended or repealed and new Affymetrix board of directors requires the bylaws made either: approval of a majority of the entire board of directors. The stockholders also have - by the stockholders at any meeting of power to adopt, amend or repeal the bylaws the stockholders by the affirmative vote of the corporation; provided, however, of the holders of at least a majority in that in addition to any vote of the interest of the capital stock then holders of any class or series of stock of outstanding and then entitled to vote, the corporation required by law or by the provided that notice of the proposed charter, the affirmative vote of at least alteration, addition, amendment or a majority of the voting power of all the repeal stating such change or the then-outstanding shares of the capital substance thereof shall have been given stock of the corporation entitled to vote in the notice of such meeting or in the generally in the election of directors, waiver of notice with respect to such voting together as a single class, shall meeting, or be required to adopt, alter, amend or repeal any provision of the corporation's - by vote of a majority of the Genetic bylaws. MicroSystems board of directors then in office, except with respect to any provision as to which stockholder action is required by law, the articles, or the bylaws; provided that not later than the time of giving notice of the meeting of stockholders next following any such change in the bylaws by the directors, notice thereof shall be given to all stockholders entitled to vote on amending the bylaws. Pursuant to Delaware law, the charter Massachusetts law requires a majority vote of Affymetrix may be amended by a majority to amend the articles for certain events, vote such as
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AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- of the stockholders. an increase in the authorized capital stock or a change in corporate name, but requires a two-thirds vote for other amendments such as a change in the nature of its corporate business, or to authorize the sale, mortgage, pledge, lease or exchange of all its property or assets unless the articles of organization provide for a lesser vote, not to be less than a majority of the shares entitled to vote.
TAKEOVER LAW
AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- Section 203 of the Delaware General With certain exceptions, Chapter 110F of Corporation Law prohibits a corporation the General Laws of Massachusetts which has securities traded on a national prohibits a business combination with an securities exchange, designated on the interested stockholder, generally defined NASDAQ National Market or held of record as a person beneficially owning 5% or more by more than 2,000 stockholders from of the corporation's outstanding voting engaging in various business combinations, stock, or an interested stockholder's including a merger, sale of substantial affiliate or associate, for a three-year assets, loan or substantial issuance of period following the date that a stock, with an interested stockholder, stockholder becomes an interested defined generally as a person beneficially stockholder. This Massachusetts statute is owning 15% or more of the corporation's inapplicable to this transaction, however, outstanding voting stock, or an interested because Genetic MicroSystems has fewer stockholder's affiliates or associates, than two hundred stockholders of record. for a three-year period beginning on the date the interested stockholder acquires 15% or more of the outstanding voting stock of the corporation. The restrictions on business combinations do not apply if: - - the board of directors gives prior approval to the transaction in which the 15% ownership level is exceeded, - - the interested stockholder acquires 85% or more of the corporation's outstanding stock in the same transaction in which the stockholder's ownership first exceeds 15%, excluding those shares owned by persons who are directors and also officers as well as by employee stock plans in which employees do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or - - on or following the date on which the stockholder became an interested stockholder, the board of directors approves the business
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AFFYMETRIX GENETIC MICROSYSTEMS ---------- -------------------- combination and the holders of at least two-thirds of the outstanding voting stock, excluding shares owned by the interested stockholder, authorize the business combination at a meeting of stockholders. Although a Delaware corporation may elect, pursuant to its certificate or bylaws, not to be governed by this provision, the charter and the Affymetrix bylaws do not contain these elections. The Delaware General Corporation Law The Massachusetts Business Corporation Law generally requires that mergers and provides that a merger agreement must be consolidations, and sales, leases or approved by a vote of two-thirds of the exchanges of all or substantially all of a shares of each class of stock unless the corporation's property and assets be articles of organization of the approved by the directors and by a vote of corporation provide for a vote of a lesser the holders of a majority of the proportion but not less than a majority of outstanding stock entitled to vote, though shares outstanding and entitled to vote. a corporation's certificate of See "The Genetic MicroSystems Special incorporation may require a Meeting -- Required Vote" on page 41 for a greater-than-majority vote. Under the discussion on the voting provisions in the Delaware General Corporation Law, a Genetic MicroSystems articles with respect surviving corporation need not have to the merger. stockholder approval for a merger if: - - each share of the surviving corporation's stock outstanding prior to the merger remains outstanding in identical form after the merger; - - there is no amendment to its certificate of incorporation; and - - the consideration going to stockholders of the non-surviving corporation is not common stock (or securities convertible into common stock) of the surviving corporation or, if it is such stock or securities convertible into such stock, the aggregate number of common shares actually issued or delivered, or initially issuable upon conversion does not exceed 20% of the shares of the survivor's common stock outstanding immediately prior to the effective date of the merger.
93 104 VALIDITY OF SHARES The validity of the Affymetrix common stock to be issued in connection with the merger will be passed upon by the General Counsel of Affymetrix. Certain tax matters relating to the merger will be passed upon by Sullivan & Cromwell, New York, New York, and Palmer & Dodge, LLP, Boston, Massachusetts. See "The Merger -- Material Federal Income Tax Consequences" on p. 49. EXPERTS Ernst & Young LLP, independent auditors, have audited Affymetrix's financial statements and schedule included in its Annual Report on Form 10-K for the year ended December 31, 1998, as set forth in their report, which is incorporated by reference in this proxy statement/prospectus. Our financial statements and schedule are incorporated by reference in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. Ernst & Young LLP, independent auditors, have audited Genetic Microsystems' financial statements for the year ended December 31, 1998 and for the period from August 7, 1997 (date of inception) to December 31, 1997, as set forth in their report. We have included these financial statements in this document in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION Affymetrix is subject to the informational requirements of the Exchange Act and, in accordance therewith, file reports, proxy statements and other information with the Securities and Exchange Commission. The reports, proxy statements and other information filed by Affymetrix with the Securities and Exchange Commission can be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange Commission Regional Offices located at 7 World Trade Center, 13th floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material also can be obtained at prescribed rates from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, Washington, D.C. 20549. Information regarding the Public Reference Room may be obtained by calling the Securities and Exchange Commission at (800) 732-0330. In addition, Affymetrix is required to file electronic versions of such material with the Securities and Exchange Commission through the Securities and Exchange Commission's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The Securities and Exchange Commission maintains a World Wide Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. Affymetrix common stock is listed on the NASDAQ National Market and reports and other information concerning Affymetrix can also be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20001-1500. Affymetrix has filed with the Securities and Exchange Commission a Registration Statement on Form S-4 under the Exchange Act with respect to the shares of Affymetrix common stock to be issued pursuant to the merger agreement. The Securities and Exchange Commission allows Affymetrix to "incorporate by reference" information into this document, which means that Affymetrix can disclose important information to you by referring you to another document filed separately with the Securities and Exchange Commission. Statements contained in this document or in any document incorporated by reference in this document as to the contents of any contract or other document referred to herein or therein are 94 105 not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement on Form S-4 or such other document, each such statement being qualified in all respects by such reference. The information incorporated by reference is deemed to be part of this document. This document incorporates by reference the documents set forth below that Affymetrix have previously filed with the Securities and Exchange Commission. These documents contain important information about Affymetrix and its finances.
AFFYMETRIX SEC FILINGS (FILE NO. 0-28218) PERIOD OR DATE FILED ---------------------- -------------------- Annual Report on Form 10-K Year ended December 31, 1998 Quarterly Report on Form 10-Q Quarter ended March 31, 1999 Quarterly Report on Form 10-Q Quarter ended June 30, 1999 1999 Proxy Statement For annual meeting of stockholders held on June 9, 1999 Current Reports on Form 8-K Filed on April 1, 1999 and September 28, 1999 Description of rights to purchase Series B Filed on October 16, 1999 Junior Participating Preferred Stock from Registration Statement on Form 8-A
We are also incorporating by reference additional documents that we filed with the Securities and Exchange Commission between the date of this document and the date of the special meeting. Affymetrix has supplied all information contained or incorporated by reference in this document relating to Affymetrix and Genetic MicroSystems has supplied all such information relating to Genetic MicroSystems. Documents incorporated by reference are available from Affymetrix without charge, excluding all exhibits unless Affymetrix has specifically incorporated by reference an exhibit in this document. Stockholders may obtain documents incorporated by reference in this document by requesting them in writing or by telephone from the appropriate party at the following addresses: AFFYMETRIX, INC. CORPORATE SECRETARY 3380 CENTRAL EXPRESSWAY SANTA CLARA, CALIFORNIA 95051 (408) 731-5000 Genetic MicroSystems is a privately held corporation that is not subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and therefore does not incorporate information in this document by reference unless such information appears in an Appendix to this document. 95 106 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS DOCUMENT TO VOTE ON THE MERGER AGREEMENT. AFFYMETRIX AND GENETIC MICROSYSTEMS HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS DOCUMENT. THIS DOCUMENT IS DATED --, 1999. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS DOCUMENT IS ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND NEITHER THE MAILING OF THIS DOCUMENT TO STOCKHOLDERS OF GENETIC MICROSYSTEMS NOR THE ISSUANCE OF AFFYMETRIX COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY. 96 107 APPENDIX A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER AMONG AFFYMETRIX, INC., GMS ACQUISITION, INC., GENETIC MICROSYSTEMS, INC., JEAN MONTAGU (AS STOCKHOLDER REPRESENTATIVE) AND THE STOCKHOLDERS SET FORTH ON THE SIGNATURE PAGES TO THIS AGREEMENT DATED AS OF SEPTEMBER 10, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- A-1 108 TABLE OF CONTENTS
PAGE ---- RECITALS ARTICLE I DEFINITIONS ARTICLE II THE MERGER; CLOSING; EFFECTIVE TIME 2.1. The Merger....................................................... A-11 2.2. Closing.......................................................... A-11 2.3. Effective Time................................................... A-11 ARTICLE III ARTICLES OF ORGANIZATION AND BY-LAWS OF THE SURVIVING CORPORATION 3.1. The Articles of Organization..................................... A-11 3.2. The By-Laws...................................................... A-11 ARTICLE IV OFFICERS AND DIRECTORS OF THE SURVIVING CORPORATION 4.1. Directors........................................................ A-12 4.2. Officers......................................................... A-12 ARTICLE V EFFECT OF THE MERGER ON CAPITAL STOCK; EXCHANGE OF CERTIFICATES 5.1. Effect on Capital Stock.......................................... A-12 (a) Merger Consideration........................................ A-12 (b) Cancellation of Shares...................................... A-12 5.2. Exchange of Certificates for Shares.............................. A-12 (a) Exchange Agent.............................................. A-12 (b) Exchange Procedures......................................... A-13 (c) Distributions with Respect to Unexchanged Shares............ A-13 (d) Transfers................................................... A-14 (e) Fractional Shares........................................... A-14 (f) Termination of Exchange Fund................................ A-14 (g) Lost, Stolen or Destroyed Certificates...................... A-14 (h) Affiliates.................................................. A-14 5.3. Appraisal Rights................................................. A-14 5.4. Adjustments to Prevent Dilution.................................. A-15 5.5. Treatment of Warrants and Company Options........................ A-15 5.6. Appointment of Stockholder Representative........................ A-15
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PAGE ---- ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.1. Representations and Warranties of the Company.................... A-15 (a) Organization, Good Standing and Qualification............... A-15 (b) Capital Structure........................................... A-16 (c) Corporate Authority; Approval and Fairness.................. A-16 (d) Governmental Filings; No Violations......................... A-16 (e) Financial Statements........................................ A-17 (f) Absence of Certain Changes.................................. A-17 (g) Litigation and Liabilities.................................. A-17 (h) Employee Benefits........................................... A-18 (i) Compliance; Permits......................................... A-19 (j) Takeover Statutes........................................... A-19 (k) Environmental Matters....................................... A-19 (l) Accounting and Tax Matters.................................. A-20 (m) Taxes....................................................... A-20 (n) Labor Matters............................................... A-20 (o) Insurance................................................... A-21 (p) Intellectual Property....................................... A-21 (q) Year 2000 Compliance........................................ A-23 (r) Title to Properties; Encumbrances........................... A-23 (s) Contracts................................................... A-23 (t) Condition and Sufficiency of Assets......................... A-24 (u) Certain Payments............................................ A-24 (v) Disclosure.................................................. A-24 (w) Books and Records........................................... A-24 (x) Brokers and Finders......................................... A-25 6.2. Representations and Warranties of Parent and Merger Sub.......... A-25 (a) Capitalization of Parent and Merger Sub..................... A-25 (b) Organization, Good Standing and Qualification............... A-25 (c) Corporate Authority......................................... A-25 (d) Governmental Filings; No Violations......................... A-26 (e) Parent Reports; Financial Statements........................ A-26 (f) Accounting and Tax Matters.................................. A-26 (g) No Parent Material Adverse Effect........................... A-27 (h) Brokers and Finders......................................... A-27 ARTICLE VII COVENANTS 7.1. Interim Operations of the Company................................ A-27 7.2. Acquisition Proposals............................................ S-28 7.3. Information Supplied............................................. A-29 7.4. Stockholders Meeting............................................. A-29 7.5. Filings; Other Actions........................................... A-29 7.6. Taxation and Accounting.......................................... A-31 7.7. Access........................................................... A-31 7.8. Affiliates....................................................... A-31
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PAGE ---- 7.9. Quotation of Parent Common Stock................................. A-32 7.10. Publicity........................................................ A-32 7.11. Benefits......................................................... A-32 (a) Stock Options............................................... A-32 (b) Employee Benefits........................................... A-32 7.12. Expenses; Cash Paid to Dissenting Stockholders................... A-33 7.13. Takeover Statutes................................................ A-33 7.14. Warrants......................................................... A-33 7.15. Assignment of Contracts.......................................... A-33 ARTICLE VIII CONDITIONS 8.1. Conditions to Each Party's Obligation to Effect the Merger....... A-33 (a) Stockholder Approval........................................ A-33 (b) NASDAQ Quotation............................................ A-33 (c) Regulatory Consents......................................... A-33 (d) Litigation.................................................. A-34 (e) Accountant Letter........................................... A-34 (f) S-4 Registration Statement.................................. A-34 (g) Tax Opinions................................................ A-34 8.2. Conditions to Obligations of Parent and Merger Sub............... A-34 (a) Representations and Warranties.............................. A-34 (b) Performance of Obligations of the Company................... A-34 (c) Consents Under Agreements................................... A-34 (d) Legal Opinion............................................... A-35 (e) Resignations................................................ A-35 (f) Non-competition Agreements.................................. A-35 (g) Affiliates Letters.......................................... A-35 8.3. Conditions to Obligation of the Company.......................... A-35 (a) Representations and Warranties.............................. A-35 (b) Performance of Obligations of Parent and Merger Sub......... A-35 (c) Consents Under Agreements................................... A-35 (d) Legal Opinion............................................... A-35 ARTICLE IX TERMINATION 9.1. Termination by Mutual Consent.................................... A-35 9.2. Termination by Either Parent or the Company...................... A-35 9.3. Termination by the Company....................................... A-36 9.4. Termination by Parent............................................ A-36 9.5. Effect of Termination and Abandonment............................ A-36
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PAGE ---- ARTICLE X INDEMNIFICATION 10.1. Survival; Right to Indemnification Not Affected by Knowledge; Representations and Warranties Made as of the Closing Date....... A-37 10.2. Indemnification and Payment of Damages by Holders of Shares...... A-38 10.3. Indemnification and Payment of Damages by Parent................. A-38 10.4. Limitations on Amount -- Holder of Shares........................ A-38 10.5. Limitations on Amount -- Parent.................................. A-38 10.6. Payments to Parent............................................... A-39 10.7. Procedures for Indemnification................................... A-39 10.8. Non-Exclusive Remedy............................................. A-39 10.9. Tax Treatment.................................................... A-40 10.10. Pooling.......................................................... A-40 ARTICLE XI MISCELLANEOUS AND GENERAL 11.1. Modification or Amendment........................................ A-40 11.2. Waiver of Conditions............................................. A-40 11.3. Counterparts..................................................... A-40 11.4. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL.................... A-40 11.5. Notices.......................................................... A-41 11.6. Entire Agreement................................................. A-42 11.7. No Third Party Beneficiaries..................................... A-42 11.8. Obligations of Parent............................................ A-42 11.9. Transfer Taxes................................................... A-42 11.10. Severability..................................................... A-42 11.11. Interpretation................................................... A-42 11.12. Assignment....................................................... A-42 11.13. Specific Performance............................................. A-43
A-5 112 AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement") is made as of September 10, 1999, by and among Genetic MicroSystems, Inc., a Massachusetts corporation (the "Company"), Affymetrix, Inc., a Delaware corporation ("Parent"), GMS Acquisition, Inc., a Massachusetts corporation and a wholly-owned subsidiary of Parent ("Merger Sub," the Company and Merger Sub sometimes being hereinafter collectively referred to as the "Constituent Corporations") and Jean Montagu (the "Stockholder Representative") and the stockholders of the Company set forth on the signature pages to this Agreement. RECITALS WHEREAS, the respective boards of directors of each of Parent, Merger Sub and the Company have approved the merger of the Company with and into Merger Sub (the "Merger") and approved the Merger upon the terms and subject to the conditions set forth in this Agreement and have determined that the Merger and the other transactions contemplated by this Agreement are fair to, and in the best interests of, their respective stockholders; WHEREAS, it is intended that, for federal income tax purposes, the Merger shall qualify as a reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder (the "Code") and the parties intend, by executing this Agreement, to adopt this Agreement as a plan of reorganization within the meaning of Section 368 of the Code; WHEREAS, for financial accounting purposes, it is intended that the Merger shall be accounted for as a "pooling-of-interests;" WHEREAS, contemporaneously with the execution and delivery of this Agreement, as a condition and inducement to Parent's and Merger Sub's willingness to enter into this Agreement, the Company is entering into a stock option agreement with Parent (the "Stock Option Agreement"), pursuant to which the Company has granted to Parent an option to purchase Common Shares (as defined below) under the terms and conditions set forth in the Stock Option Agreement; WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition and inducement to Parent's and Merger Sub's willingness to enter into this Agreement, certain stockholders of the Company have entered into Stockholder Voting Agreements, dated as of the date of this Agreement (collectively, the "Stockholder Voting Agreements"), pursuant to which such stockholders have agreed to, among other things, vote their shares of capital stock of the Company in favor of this Agreement and the Merger; and WHEREAS, the Company, Parent and Merger Sub desire to make certain representations, warranties, covenants and agreements in connection with this Agreement. A-6 113 NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS For purposes of this Agreement, the following terms have the meanings specified or referred to in this Article I: "Acquisition Proposal" shall have the meaning set forth in Section 7.2. "Affiliate" means with respect to any Person, any director or executive officer of such Person and any other Person which would constitute an "affiliate" of such Person within the meaning of Rule 12b-2 under the Exchange Act. "Affiliates Letter" shall have the meaning set forth in Section 7.8. "Agreement" shall have the meaning set forth in the paragraph before the Recitals. "Appraisal Rights Provisions" shall have the meaning set forth in Section 5.1(a). "Balance Sheet Date" shall have the meaning set forth in Section 6.1(e). "Bankruptcy and Equity Exception" shall have the meaning set forth in Section 6.1(c). "By-laws" shall have the meaning set forth in Section 3.2. "Certificate" shall have the meaning set forth in Section 5.1(a). "Charter" shall have the meaning set forth in Section 3.1. "Closing" shall have the meaning set forth in Section 2.2. "Closing Date" shall have the meaning set forth in Section 2.2. "Code" shall have the meaning set forth in the Recitals. "Commercial Software Licenses" shall have the meaning set forth in Section 6.1(p). "Company" shall have the meaning set forth in the paragraph before the Recitals. "Company Disclosure Schedule" means the disclosure schedule delivered by the Company to Parent prior to the execution and delivery of this Agreement. "Company Intellectual Property Rights" shall have the meaning set forth in Section 6.1(p). "Company Material Adverse Effect" shall mean any change, event or effect that, individually or in the aggregate, is or is reasonably likely to have a material adverse effect on the financial condition, properties, prospects, business or results of operations of the Company or on the Company's ability to perform its obligations, if any, as contemplated in the Transaction Agreements. "Company Option" shall have the meaning set forth in Section 6.1(b). "Company Requisite Vote" shall have the meaning set forth in Section 6.1(c). "Compensation and Benefit Plans" shall have the meaning set forth in Section 6.1(h). "Common Share" shall have the meaning set forth in Section 5.1(a). "Constituent Corporations" shall have the meaning set forth in the paragraph before the Recitals. A-7 114 "Contract" means any agreement, lease, contract, note, mortgage, indenture, arrangement or other obligation. "Damages" shall have the meaning set forth in Section 10.2. "Dissenting Shares" shall have the meaning set forth in Section 5.1(a). "Dissenting Stockholders" shall have the meaning set forth in Section 5.1(a). "Effective Time" shall have the meaning set forth in Section 2.3. "Encumbrance" means any mortgage, easement, right of way, charge, claim, community property interest, condition, equitable interest, lien, option, pledge, security interest, right of first refusal, or restriction or adverse claim of any kind, including any restriction on use, voting, transfer, receipt of income, or exercise of any other attribute of ownership, or any other encumbrance or exception to title of any kind. "Environmental Health and Safety Law" means any federal, state, local or foreign statute, law, regulation, order, decree, permit, authorization, common law or binding agency requirement relating to: (A) the protection, investigation or restoration of the environment, health, safety, or natural resources, (B) the handling, use, presence, disposal, release or threatened release of any Hazardous Substance or (C) noise, odor, indoor air, employee exposure, wetlands, pollution, contamination or any injury or threat of injury to persons or property. "ERISA" shall have the meaning set forth in Section 6.1(h). "ERISA Affiliate" shall have the meaning set forth in Section 6.1(h). "Escrow Agreement" means the Escrow Agreement dated as of the date of this Agreement among Parent, the Stockholder Representative and the Escrow Agent (as defined in the Escrow Agreement). "Excluded Shares" shall have the meaning set forth in Section 5.1(a). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exchange Agent" shall have the meaning set forth in Section 5.2(a). "Exchange Fund" shall have the meaning set forth in Section 5.2(a). "Financial Statements" shall have the meaning set forth in Section 6.1(e). "GAAP" means United States generally accepted accounting principles. "Governmental Entity" means any (i) nation, state, county, city, town, village, district, or other jurisdiction of any nature, (ii) federal, state, local, municipal, foreign, or other government; (iii) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official, or entity and any court or other tribunal) or (iv) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature (including any self-regulatory organization). "Hazardous Substance" means any substance that is: (A) listed, classified or regulated pursuant to any Environmental Health and Safety Law; (B) any petroleum product or by-product, asbestos-containing material, lead-containing paint, polychlorinated biphenyls, radioactive material or radon; or (C) any other substance which may be the subject of regulatory action by any Government Entity in connection with any Environmental Health and Safety Law. "Holdback" means 10% (or the maximum percentage permitted that is consistent with pooling of interests accounting treatment) of the aggregate number of shares of Parent Common Stock to be delivered by Parent at Closing, rounded down to the nearest whole share. A-8 115 "Holdback Account" means the account maintained by the Escrow Agent pursuant to the terms of the Escrow Agreement in respect of the Holdback. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indemnified Party" shall have the meaning set forth in Section 10.7. "Indemnifying Parties" shall have the meaning set forth in Section 10.7. "Intellectual Property Rights" shall have the meaning set forth in Section 6.1(p). "knowledge" with respect to the Company shall mean the actual knowledge of Jean Montagu, Stanley Rose, Peter Honkanen or Peter Lewis or to the knowledge that such individuals would reasonably be expected to have after reasonable inquiry arising after the conduct by such individuals of a reasonable investigation with respect to the facts or matters specified. "Law" means any federal, state, local, foreign or international law, statute, ordinance, rule, regulation, treaty, judgment, order, injunction, decree, arbitration award, agency requirement, license or permit of any Governmental Entity. "Massachusetts Articles of Merger" shall have the meaning set forth in Section 2.3. "MBCL" shall have the meaning set forth in Section 2.1. "Merger" shall have the meaning set forth in the Recitals. "Merger Consideration" shall have the meaning set forth in Section 5.1(a). "Merger Sub" shall have the meaning set forth in the paragraph before the Recitals. "NASDAQ" shall mean the NASDAQ Stock Market. "New Parent Option" shall have the meaning set forth in Section 7.11(a). "Order" shall have the meaning set forth in Section 8.1(d). "Organizational Documents" shall have the meaning set forth in Section 6.1(a). "Parent" shall have the meaning set forth in the paragraph before the Recitals. "Parent Common Stock" shall have the meaning set forth in Section 5.1(a). "Parent Companies" shall have the meaning set forth in Section 5.1(a). "Parent Disclosure Schedule" means the disclosure schedule delivered by Parent to the Company prior to the execution and delivery of this Agreement. "Parent Indemnified Parties" shall have the meaning set forth in Section 10.2. "Parent Material Adverse Effect" shall mean any change, event or effect that, individually or in the aggregate, is or is reasonably likely to have a material adverse effect on the financial condition, properties, prospects, business or results of operations of Parent and its Subsidiaries, taken as a whole, or on Parent's ability to perform its obligations, if any, as contemplated in the Transaction Agreements. "Parent Reports" shall have the meaning set forth in Section 6.2(e). "Person" shall mean any individual, corporation (including not-for-profit), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, Governmental Entity or other entity of any kind or nature. "Pooling Affiliates Letter" shall have the meaning set forth in Section 7.8. A-9 116 "Preferred Share" shall have the meaning set forth in Section 5.1(a). "Prospectus/Proxy Statement" shall have the meaning set forth in Section 7.3. "Representatives" shall have the meaning set forth in Section 7.7. "S-4 Registration Statement" shall have the meaning set forth in Section 7.3. "SEC" shall mean the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Shares" shall have the meaning set forth in Section 5.1(a). "Stock Option Agreement" shall have the meaning set forth in the Recitals. "Stockholder Representative" shall have the meaning set forth in the paragraph before the Recitals. "Stockholder Voting Agreements" shall have the meaning set forth in the Recitals. "Stockholders Meeting" shall have the meaning set forth in Section 7.4. "Subsidiary" shall mean, with respect to the Company, Parent or Merger Sub, as the case may be, any entity, whether incorporated or unincorporated, of which at least a majority of the securities or ownership interests having by their terms ordinary voting power to elect a majority of the board of directors or other persons performing similar functions is directly or indirectly owned or controlled by such party or by one or more of its respective Subsidiaries or by such party and any one or more of its respective Subsidiaries. "Superior Proposal" shall have the meaning set forth in Section 7.2. "Survival Date" shall have the meaning set forth in Section 10.1. "Surviving Corporation" shall have the meaning set forth in Section 2.1. "Systems" shall have the meaning set forth in Section 6.1(q). "Takeover Statute" shall have the meaning set forth in Section 6.1(j). "Tax" (including, with correlative meaning, the terms "Taxes", and "Taxable") means all federal, state, local and foreign income, profits, franchise, gross receipts, environmental, customs duty, capital stock, severances, stamp, payroll, sales, employment, unemployment, disability, use, property, withholding, excise, production, value added, occupancy and other taxes, duties or assessments of any nature whatsoever, together with all interest, penalties and additions imposed with respect to such amounts and any interest in respect of such penalties and additions. "Tax Return" means all returns and reports (including elections, declarations, disclosures, schedules, estimates and information returns) required to be supplied to a Tax authority relating to Taxes. "Termination Date" shall have the meaning set forth in Section 9.2. "Third Party Intellectual Property Licenses" shall have the meaning set forth in Section 6.1(p). "Transaction Agreements" shall mean the Merger Agreement, the Stock Option Agreement, the Stockholder Voting Agreements and the Escrow Agreement. "Voting Debt" shall have the meaning set forth in Section 6.1(b). "Warrant" shall have the meaning set forth in Section 6.1(b). A-10 117 "Year 2000 Compliant" means that a System shall be able to process (including without limitation calculate, compare and sequence) accurately date and time from, into and between the years 1999 and 2000 and any other years in the 20th and 21st centuries, including the making of accurate leap year calculations. ARTICLE II THE MERGER; CLOSING; EFFECTIVE TIME 2.1. The Merger. Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time, the Company shall be merged with and into Merger Sub and the separate corporate existence of the Company shall thereupon cease. Merger Sub shall be the surviving corporation in the Merger (sometimes hereinafter referred to as the "Surviving Corporation"). The Merger shall have the effects specified in the Massachusetts Business Corporation Law, as amended (the "MBCL"). 2.2. Closing. The closing of the Merger (the "Closing") shall take place (i) at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New York at 9:00 A.M. on the later of (x) January 14, 2000 or such earlier date as selected by Parent in a written notice delivered to the Company or (y) the first business day on which the last to be fulfilled or waived of the conditions set forth in Article VIII (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the fulfillment or waiver of those conditions) shall be satisfied or waived in accordance with this Agreement or (ii) at such other place and time and/or on such other date as the Company and Parent may agree in writing (the "Closing Date"). 2.3. Effective Time. As soon as practicable following the Closing, the Company and Parent will cause Articles of Merger (the "Massachusetts Articles of Merger") to be executed, acknowledged and filed with the Secretary of State of the Commonwealth of Massachusetts as provided in Section 84 of Chapter 156B of the MBCL. The Merger shall become effective at the time when the Massachusetts Articles of Merger have been duly filed with the Secretary of State of the Commonwealth of Massachusetts, unless such Massachusetts Articles of Merger specify a later effective date in which event the Merger shall become effective on such later date (the "Effective Time"). ARTICLE III ARTICLES OF ORGANIZATION AND BY-LAWS OF THE SURVIVING CORPORATION 3.1. The Articles of Organization. The articles of organization of Merger Sub as in effect immediately prior to the Effective Time shall be the articles of organization of the Surviving Corporation (the "Charter"), until duly amended as provided therein or by applicable law, except that Article 1 of the Charter shall be amended to change the name of the Surviving Corporation to "Genetic MicroSystems, Inc." 3.2. The By-Laws. The by-laws of Merger Sub in effect at the Effective Time shall be the by-laws of the Surviving Corporation (the "By-Laws"), until thereafter amended as provided therein or by applicable law. A-11 118 ARTICLE IV OFFICERS AND DIRECTORS OF THE SURVIVING CORPORATION 4.1. Directors. The directors of Merger Sub at the Effective Time shall, from and after the Effective Time, be the directors of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Charter and the By-Laws. Prior to the Effective Time, the Company shall take all actions necessary to obtain any resignations of its directors necessary to give effect to the provisions of this Section. 4.2. Officers. The officers of Merger Sub at the Effective Time shall, from and after the Effective Time, be the officers of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Charter and the By-Laws. ARTICLE V EFFECT OF THE MERGER ON CAPITAL STOCK; EXCHANGE OF CERTIFICATES 5.1. Effect on Capital Stock. At the Effective Time, as a result of the Merger and without any action on the part of the holder of any capital stock of the Company: (a) Merger Consideration. Each share of the Common Stock, no par value per share, of the Company and each share of the Preferred Stock, par value $0.01 per share, of the Company (as applicable a "Common Share" or a "Preferred Share"; or collectively, the "Shares") issued and outstanding immediately prior to the Effective Time (other than Shares ("Dissenting Shares") that are owned by stockholders exercising appraisal rights ("Dissenting Stockholders") pursuant to Chapter 156B Sections 86 through 98 of the MBCL (the "Appraisal Rights Provisions") or Shares owned by Parent, Merger Sub or any other direct or indirect Subsidiary of Parent (collectively, the "Parent Companies") or Shares that are owned by the Company and are not held on behalf of third parties (collectively, "Excluded Shares")) shall, subject to Section 5.2(e), be converted into the right to receive that number of shares (the "Merger Consideration"), of Common Stock, par value $0.01 per share, of Parent ("Parent Common Stock") determined by dividing 1,070,000 by the aggregate number of Shares issued and outstanding and Shares subject to Company Options or Warrants (whether vested or unvested or currently exercisable or unexercisable), in each case, immediately prior to the Effective Time. At the Effective Time, all Shares shall no longer be outstanding and shall be canceled and retired and shall cease to exist, and each certificate (a "Certificate") formerly representing any of such Shares (other than Excluded Shares) shall thereafter represent only the right to the Merger Consideration and the right, if any, to receive pursuant to Section 5.2(e) cash in lieu of fractional shares into which such Shares have been converted pursuant to this Section 5.1(a) and any distribution or dividend pursuant to Section 5.2(c). (b) Cancellation of Shares. Each Share issued and outstanding immediately prior to the Effective Time and owned by any of the Parent Companies or owned by the Company (other than Shares that are in each case owned on behalf of third parties), shall, by virtue of the Merger and without any action on the part of the holder thereof, cease to be outstanding, shall be canceled and retired without payment of any consideration therefor and shall cease to exist. 5.2. Exchange of Certificates for Shares. (a) Exchange Agent. As of the Effective Time, Parent shall deposit, or shall cause to be deposited, with an exchange agent selected by Parent (the "Exchange Agent"), for the benefit of the A-12 119 holders of Shares, certificates representing the shares of Parent Common Stock and, after the Effective Time, if applicable, any cash, dividends or other distributions with respect to the Parent Common Stock to be issued or paid pursuant to the last sentence of Section 5.1(a) in exchange for Shares outstanding immediately prior to the Effective time upon due surrender of the Certificates (or affidavits of loss in lieu thereof) pursuant to the provisions of this Article V (such certificates for shares of Parent Common Stock, together with the amount of any dividends or other distributions payable with respect thereto, being hereinafter referred to as the "Exchange Fund"). (b) Exchange Procedures. Promptly after the Effective Time, the Surviving Corporation shall cause the Exchange Agent to mail to each holder of record of Shares (other than holders of Excluded Shares) (i) a letter of transmittal specifying that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates (or affidavits of loss in lieu thereof) to the Exchange Agent and (ii) instructions for use in effecting the surrender of the Certificates in exchange for (A) certificates representing shares of Parent Common Stock and (B) any unpaid dividends and other distributions and cash in lieu of fractional shares. Subject to Section 5.2(h), upon surrender of a Certificate for cancellation to the Exchange Agent together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor (x) a certificate representing that number of whole shares of Parent Common Stock that such holder is entitled to receive pursuant to this Article V, (y) a check in the amount (after giving effect to any required tax withholdings) of (A) any cash in lieu of fractional shares plus (B) any unpaid non-stock dividends and any other dividends or other distributions that such holder has the right to receive pursuant to the provisions of this Article V, and the Certificate so surrendered shall forthwith be cancelled. No interest will be paid or accrued on any amount payable upon due surrender of the Certificates. In the event of a transfer of ownership of Shares that is not registered in the transfer records of the Company, a certificate representing the proper number of shares of Parent Common Stock, together with a check for any cash to be paid upon due surrender of the Certificate and any other dividends or distributions in respect thereof, may be issued and/or paid to such a transferee if the Certificate formerly representing such Shares is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. If any certificate for shares of Parent Common Stock is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it shall be a condition of such exchange that the Person requesting such exchange shall pay any transfer or other taxes required by reason of the issuance of certificates for shares of Parent Common Stock in a name other than that of the registered holder of the Certificate surrendered, or shall establish to the satisfaction of Parent or the Exchange Agent that such tax has been paid or is not applicable. (c) Distributions with Respect to Unexchanged Shares. All shares of Parent Common Stock to be issued pursuant to the Merger shall be deemed issued and outstanding as of the Effective Time and whenever a dividend or other distribution is declared by Parent in respect of the Parent Common Stock, the record date for which is at or after the Effective Time, that declaration shall include dividends or other distributions in respect of all shares issuable pursuant to this Agreement. No dividends or other distributions in respect of the Parent Common Stock shall be paid to any holder of any unsurrendered Certificate until such Certificate is surrendered for exchange in accordance with this Article V. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be issued and/or paid to the holder of the certificates representing whole shares of Parent Common Stock issued in exchange therefor, without interest, (A) at the time of such surrender, the dividends or other distributions with a record date for which is at or after the Effective Time theretofore payable with respect to such whole shares of Parent Common Stock and not paid and (B) at the appropriate payment date, the dividends or other distributions payable with respect to such A-13 120 whole shares of Parent Common Stock with a record date for which is at or after the Effective Time but with a payment date subsequent to surrender. (d) Transfers. After the Effective Time, there shall be no transfers on the stock transfer books of the Company of the Shares that were outstanding immediately prior to the Effective Time. (e) Fractional Shares. Notwithstanding any other provision of this Agreement, no fractional shares of Parent Common Stock shall be issued and any holder of Shares entitled to receive a fractional share of Parent Common Stock but for this Section 5.2(e) shall be entitled to receive, as of the date on which those holders entitled to receive fractional shares are determined, a cash payment in lieu thereof, without interest, which payment shall represent such holder's proportionate interest in the net proceeds from the sale by the Exchange Agent on behalf of such holder of the aggregate fractional shares of Parent Common Stock that such holder otherwise would be entitled to receive. Any such sale shall be made by the Exchange Agent on the date on which those holders entitled to receive fractional shares are determined. (f) Termination of Exchange Fund. Any portion of the Exchange Fund (including the proceeds of any investments thereof and any Parent Common Stock) that remains unclaimed by the stockholders of the Company for 180 days after the Effective Time shall be paid to Parent. Any stockholders of the Company who have not theretofore complied with this Article V shall thereafter look only to Parent for payment of their shares of Parent Common Stock and any cash, dividends and other distributions in respect thereof payable and/or issuable pursuant to Section 5.1 and Section 5.2(c) upon due surrender of their Certificates (or affidavits of loss in lieu thereof), in each case, without any interest thereon. Notwithstanding the foregoing, none of Parent, the Surviving Corporation, the Exchange Agent or any other Person shall be liable to any former holder of Shares for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. (g) Lost, Stolen or Destroyed Certificates. In the event any Certificate shall have been lost, stolen or destroyed, upon the making and delivery to the Exchange Agent of an affidavit of that fact by the Person claiming such Certificate to be lost, stolen or destroyed and, if required by Parent, the posting by such Person of a bond in customary amount as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the shares of Parent Common Stock and any cash payable and any unpaid dividends or other distributions in respect thereof pursuant to Section 5.2(c) upon due surrender of and deliverable in respect of the Shares represented by such Certificate pursuant to this Agreement. (h) Affiliates. Notwithstanding anything herein to the contrary, Certificates surrendered for exchange by any "affiliate" (as determined pursuant to Section 7.8) of the Company shall not be exchanged until Parent has received a written agreement from such Person as provided in Section 7.8 hereof. 5.3. Appraisal Rights. No Dissenting Stockholder shall be entitled to shares of Parent Common Stock or cash in lieu of fractional shares thereof or any dividends or other distributions pursuant to this Article V unless and until the holder thereof shall have failed to perfect or shall have effectively withdrawn or lost such holder's right to dissent from the Merger under the Appraisal Rights Provisions, and any Dissenting Stockholder shall be entitled to receive only the payment provided by the Appraisal Rights Provisions with respect to Shares owned by such Dissenting Stockholder. If any Person who otherwise would be deemed a Dissenting Stockholder shall have failed to perfect properly or shall have effectively withdrawn or lost the right to dissent with respect to any Shares, such Shares shall thereupon be treated as though such Shares had been converted into shares of Parent Common Stock pursuant to Section 5.1 hereof. The Company shall give Parent A-14 121 (i) prompt notice of any demands for appraisal, attempted withdrawals of such demands, and any other instruments served pursuant to applicable law received by the Company relating to stockholders' rights of appraisal and (ii) the opportunity to direct and conclude all negotiations and proceedings with respect to demand for appraisal under the MBCL. The Company shall not, except with the prior written consent of Parent, voluntarily make any payment with respect to any demands for appraisals of Dissenting Shares, offer to settle or settle any such demands or approve any withdrawal of any such demands; and Parent agrees to provide the Company with all funds necessary to pay or settle such demands for appraisal. 5.4. Adjustments to Prevent Dilution. In the event that the Company changes the number of Shares or securities convertible or exchangeable into or exercisable for Shares, or Parent changes the number of shares of Parent Common Stock or securities convertible or exchangeable into or exercisable for shares of Parent Common Stock, issued and outstanding prior to the Effective Time as a result of a reclassification, stock split (including a reverse split), stock dividend or distribution, recapitalization, merger, subdivision, issuer tender or exchange offer, or other similar transaction, the Merger Consideration shall be equitably adjusted. 5.5. Treatment of Warrants and Company Options. The Company Options shall be treated as set forth in Section 7.11 and the Warrants shall be treated as set forth in Section 7.14. 5.6. Appointment of Stockholder Representative. (a) Each holder of Shares who votes in favor of the Merger or who receives or accepts the Merger Consideration shall be deemed to have consented in all respects to the appointment of Jean Montagu as Stockholder Representative and shall be deemed to have consented to the performance by the Stockholder Representative of all rights and obligations conferred on the Stockholder Representative under this Agreement and the Escrow Agreement. (b) The Stockholder Representative shall not be liable to the Stockholders of the Company for any action taken or omitted to be taken hereunder as Stockholder Representative, except due to gross negligence or bad faith. The Stockholders of Genetic MicroSystems shall indemnify the Stockholder Representative and hold the Stockholder Representative harmless against any loss, liability or expense incurred without gross negligence or bad faith on the part of the Stockholder Representative and arising out of or in connection with the acceptance or administration of the Stockholder Representative's duties hereunder, including the reasonable fees and expenses of any legal counsel retained by the Stockholder Representative. ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.1. Representations and Warranties of the Company. The Company, the Stockholder Representative (on behalf of the stockholders of the Company) and the stockholders set forth on the signature pages to this Agreement hereby represent and warrant to Parent and Merger Sub that, except as set forth in a correspondingly numbered schedule in the Company Disclosure Schedule: (a) Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts and has all requisite corporate or similar power and authority to own and operate its properties and assets and to carry on its business as presently conducted and is qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the ownership or operation of its properties or conduct of its business requires such qualification. The Company has delivered to Parent a complete and correct copy of the Company's Restated Articles of Organization and By-laws (collectively, "Organizational Documents"), each as amended to date. The Company's Organizational Documents so delivered are in full force and effect. Section 6.1(a) of the Company A-15 122 Disclosure Schedule contains a correct and complete list of each jurisdiction where the Company is organized and/or qualified to do business. The Company has no Subsidiaries and owns no security, equity or other interest in any Person. (b) Capital Structure. The authorized capital stock of the Company consists of 5,000,000 Common Shares, of which 1,006,702 Common Shares were outstanding as of the close of business on September 8, 1999, and 2,636,353 Preferred Shares, of which 2,000,000 Series A Preferred Shares and 431,977 Series B Preferred Shares were outstanding as of the close of business on September 8, 1999. All of the outstanding Shares have been duly authorized and are validly issued, fully paid and nonassessable. Other than, as of the date hereof (i) 684,297 Common Shares reserved for issuance under the Stock Option Agreement, (ii) 346,864 Common Shares reserved for issuance under the Company's 1998 Stock Option Plan (the "Stock Plan") and (iii) 122,197 Common Shares reserved for issuance in connection with the Warrants, the Company has no Shares reserved for issuance. The Company Disclosure Schedule contains a correct and complete list of each outstanding option to purchase Shares under the Stock Plan (each a "Company Option") and each outstanding Warrant to purchase Shares (each a "Warrant"), including the holder, date of grant, exercise price and number of Shares subject thereto. Except as set forth above or in Schedule 6.1(b) of the Company Disclosure Schedule, there are no preemptive or other outstanding rights, options, warrants, conversion rights, stock appreciation rights, redemption rights, repurchase rights, agreements, arrangements or commitments to issue or sell any shares of capital stock or other securities of the Company or any securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, any securities of the Company, and no securities or obligations evidencing such rights are authorized, issued or outstanding. The Company does not have outstanding any bonds, debentures, notes or other obligations the holders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with the stockholders of the Company on any matter ("Voting Debt"). (c) Corporate Authority; Approval and Fairness. (i) The Company has all requisite corporate power and authority and has taken all corporate action necessary in order to execute, deliver and perform its obligations under this Agreement and the Stock Option Agreement and to consummate, subject only to (x) approval of this Agreement by the holders of two-thirds of the Common Shares outstanding and entitled to vote, (y) approval of this Agreement (A) by the holders of two-thirds of the Preferred Shares outstanding and entitled to vote and (B) by the holders of a majority of the Series A Preferred Shares outstanding and entitled to vote and (z) the affirmative vote of a majority of the shares of the Series A Preferred Stock of the Company that the Merger does not constitute a liquidation, dissolution or winding up of the Company as set forth in the Company's Organizational Documents (collectively, the "Company Requisite Vote"). This Agreement and the Stock Option Agreement are valid and binding agreements of the Company enforceable against the Company in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles (the "Bankruptcy and Equity Exception"). (ii) The Board of Directors of the Company has unanimously approved this Agreement and the Stock Option Agreement and the Merger and the other transactions contemplated hereby. (d) Governmental Filings; No Violations. (i) Except for (A) the filing of the Massachusetts Articles of Merger pursuant to Section 2.3, (B) filings and/or notices under the HSR Act and (C) such consents, approvals, orders and authorizations as may be required under applicable state securities or "blue-sky" laws, no notices, reports or other filings are required to be made by the Company with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained by the Company from any Governmental Entity, in connection with the execution and A-16 123 delivery of this Agreement and the Stock Option Agreement by the Company and the consummation by the Company of the Merger and the other transactions contemplated hereby and thereby. (ii) The execution, delivery and performance of this Agreement and the Stock Option Agreement by the Company do not, and the consummation by the Company of the Merger and the other transactions contemplated hereby and thereby will not, constitute or result in (A) a breach or violation of, or a default under, the Organizational Documents of the Company, (B) a breach or violation of, or a default under, the acceleration of any obligations or the creation of any Encumbrance on the assets of the Company (with or without notice, lapse of time or both) pursuant to, any Contracts binding upon the Company or any Law or governmental or non-governmental permit or license to which the Company is subject or (C) any change in the rights or obligations of any party under any of the Contracts binding upon the Company. Schedule 6.1(d) of the Company Disclosure Schedule sets forth a correct and complete list of Contracts of the Company pursuant to which consents or waivers are or may be required prior to consummation of the transactions contemplated by this Agreement and the Stock Option Agreement. (e) Financial Statements. The Company has delivered to Parent: (i) the Company's audited balance sheets at December 31, 1997 and 1998 and the related statements of operations and comprehensive loss, shareholders' equity, and income and cash flows for the period from August 7, 1997 (date of inception) to December 31, 1997 and the year ended December 31, 1998, respectively, and (ii) an unaudited balance sheet of the Company at August 28, 1999 (the "Balance Sheet Date") and the related unaudited statements of income and cash flows for the eight months then ended. The financial statements referred to in this Section 6.1(e) (the "Financial Statements") fairly present the consolidated financial position and the consolidated results of operations of the business of the Company as of the dates thereof and for the periods then ended. The Financial Statements have been prepared, in each case, in accordance with GAAP consistently applied during the periods involved, except as may be noted therein. (f) Absence of Certain Changes. Since December 31, 1998, the Company has conducted its business only in, and has not engaged in any transaction other than according to, the ordinary and usual course of such business and there has not been (i) any change in the financial condition, properties, prospects, business or results of operations of the Company or any development or combination of developments that is reasonably likely to have a Company Material Adverse Effect; (ii) any damage, destruction or other casualty loss with respect to any asset or property owned, leased or otherwise used by the Company, whether or not covered by insurance; (iii) any declaration, setting aside or payment of any dividend or other distribution in respect of the capital stock of the Company; (iv) any change by the Company in accounting principles, practices or methods; or (v) any increase, except in the ordinary course of business consistent with past practice and consistent with Schedule 7.1(d) of the Company Disclosure Schedule, in the compensation payable or that could become payable by the Company to officers or key employees or any amendment of any of the Compensation and Benefit Plans or the Stock Plan. Schedule 6.1(f) of the Company Disclosure Schedule sets forth the name, title, salary and other compensation of each employee of the Company as of the date of this Agreement. (g) Litigation and Liabilities. There are no (i) civil, criminal or administrative actions, suits, claims, hearings, investigations or proceedings pending or, to the knowledge of the Company, threatened against the Company or any of its Affiliates or (ii) obligations or liabilities, whether or not accrued, contingent or otherwise, including those relating to matters involving any Environmental Health and Safety Law, or any other facts or circumstances that could result in any claims against, or obligations or liabilities of, the Company or any of its Affiliates. A-17 124 (h) Employee Benefits. (i) A copy of each bonus, deferred compensation, pension, retirement, profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted stock, stock option, employment, termination, severance, compensation, medical, health or other plan, agreement, policy or arrangement that covers current or former employees, contractors or directors of the Company (the "Compensation and Benefit Plans") and any trust agreement or insurance contract forming a part of such Compensation and Benefit Plans has been made available to Parent prior to the date hereof. The Compensation and Benefit Plans are listed in Section 6.1(h) of the Company Disclosure Schedule and any "change of control" or similar provisions therein are specifically identified in Section 6.1(h) of the Company Disclosure Schedule. (ii) All Compensation and Benefit Plans are in substantial compliance with all applicable law, including the Code and the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Each Compensation and Benefit Plan that is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA (a "Pension Plan") and that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service (the "IRS") with respect to "TRA" (as defined in Section 1 of Rev. Proc. 93-39), and the Company is not aware of any circumstances likely to result in revocation of any such favorable determination letter. There is no pending or, to the knowledge of the Company, threatened litigation relating to the Compensation and Benefit Plans. The Company has not engaged in a transaction with respect to any Compensation and Benefit Plan that, assuming the taxable period of such transaction expired as of the date hereof, would subject the Company to a tax or penalty imposed by either Section 4975 of the Code or Section 502 of ERISA. (iii) As of the date hereof, no liability under Subtitle C or D of Title IV of ERISA has been or is expected to be incurred by the Company with respect to any ongoing, frozen or terminated "single-employer plan", within the meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them, or the single-employer plan of any entity which is considered one employer with the Company under Section 4001 of ERISA or Section 414 of the Code (an "ERISA Affiliate"). The Company has not contributed, or been obligated to contribute, to a multiemployer plan under Subtitle E of Title IV of ERISA at any time since September 26, 1980. No notice of a "reportable event", within the meaning of Section 4043 of ERISA for which the 30-day reporting requirement has not been waived, has been required to be filed for any Pension Plan or by any ERISA Affiliate within the 12-month period ending on the date hereof or will be required to be filed in connection with the transactions contemplated by this Agreement and the Stock Option Agreement. (iv) All contributions required to be made under the terms of any Compensation and Benefit Plan as of the date hereof have been timely made or have been reflected on the Financial Statements. Neither any Pension Plan nor any single-employer plan of an ERISA Affiliate has an "accumulated funding deficiency" (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA. The Company has not provided, nor is it required to provide, security to any Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the Code. (v) Under each Pension Plan which is a single-employer plan, as of the last day of the most recent plan year ended prior to the date hereof, the actuarially determined present value of all "benefit liabilities", within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions contained in the Pension Plan's most recent actuarial valuation), did not exceed the then current value of the assets of such Pension Plan, and there has been no change in the financial condition of such Pension Plan since the last day of the most recent plan year. A-18 125 (vi) The Company does not have any obligations for retiree health and life benefits under any Compensation and Benefit Plan, except as set forth in the Company Disclosure Schedule, or as required by Law. The Company may amend or terminate any such plan under the terms of such plan at any time without incurring any liability thereunder except as required by Law. (vii) The consummation of the Merger and the other transactions contemplated by this Agreement or the Stock Option Agreement will not (x) entitle any employees of the Company to severance pay, (y) accelerate the time of payment or vesting or trigger any payment of compensation or benefits under, increase the amount payable or trigger any other obligation pursuant to, any of the Compensation and Benefit Plans or (z) result in any breach or violation of, or a default under, any of the Compensation and Benefit Plans. (viii) None of the Company's existing or former contractors are, or may be considered under any Law, employees of the Company. (ix) All Compensation and Benefit Plans covering current or former non-U.S. employees or former employees of the Company comply in all respects with applicable local law. The Company has no unfunded liabilities with respect to any Pension Plan that covers such non-U.S. employees. (i) Compliance; Permits. The business of the Company has not been, and is not being, conducted in violation of any Laws. No investigation or review by any Governmental Entity with respect to the Company is pending or, to the knowledge of the Company, threatened, nor has any Governmental Entity indicated an intention to conduct the same. To the knowledge of the Company, no change is required in the Company's processes, properties or procedures in connection with any Laws, and the Company has not received any notice or communication of any noncompliance with any Laws. The Company has all permits, licenses, franchises, variances, exemptions, orders and other governmental authorizations, consents and approvals necessary to conduct its business as presently conducted. (j) Takeover Statutes. No "fair price," "moratorium," "control share acquisition" or other similar anti-takeover statute or regulation (including, without limitation, Chapters 110C, 110D, 110 E and 110F of the General Laws of the Commonwealth of Massachusetts) (each a "Takeover Statute") or any anti-takeover provision in the Company's Organizational Documents is, or at the Effective Time will be, applicable to the Company, the Shares, the Merger or the other transactions contemplated by this Agreement, the Stock Option Agreement or the Stockholder Voting Agreements. (k) Environmental Matters. Except as set forth in Schedule 6.1(k) of the Company Disclosure Schedule: (i) the Company has complied at all times with all applicable Environmental Health and Safety Laws; (ii) to the knowledge of the Company no property currently owned or operated by the Company (including soils, groundwater, surface water, buildings or other structures) is contaminated with any Hazardous Substance; (iii) to the knowledge of the Company no property formerly owned or operated by the Company was contaminated with any Hazardous Substance during or prior to such period of ownership or operation; (iv) to the knowledge of the Company the Company is not subject to liability for any Hazardous Substance disposal or contamination on any third party property; (v) the Company has not been associated with any release or threat of release of any Hazardous Substance; (vi) the Company has not received any notice, demand, letter, claim or request for information alleging that the Company may be in violation of or subject to liability under any Environmental Health and Safety Law; (vii) the Company is not subject to any order, decree, injunction or other agreement with any Governmental Entity or any indemnity or other agreement with any third party relating to liability under any Environmental Health and Safety Law or relating to Hazardous Substances; (viii) to the knowledge of the Company there are no other circumstances or conditions involving the Company that could reasonably be expected to result in any claim, A-19 126 liability, investigation, cost or restriction on the ownership, use, or transfer of any property pursuant to any Environmental Health and Safety Law; and (ix) the Company has delivered to Parent copies of all written environmental reports, studies, assessments, sampling data and other environmental information in its possession relating to the Company or its current and former properties or operations. (l) Accounting and Tax Matters. (i) Neither the Company nor any of its Affiliates has taken or agreed to take any action, nor does the Company have any knowledge of any fact or circumstance, that would prevent Parent from accounting for the business combination to be effected by the Merger as a "pooling-of-interests" or prevent the Merger and the other transactions contemplated by this Agreement from qualifying as a "reorganization" within the meaning of Section 368(a) of the Code. (ii) The representations and warranties that are set forth in the Company's letter to be delivered by the Company to Ernst & Young LLP in connection with Section 8.1(e) are hereby adopted as if such representations and warranties were fully set forth herein; provided that no representation or warranty is made to the extent such representation or warranty relates to Parent. (m) Taxes. The Company (i) has prepared in good faith and duly and timely filed (taking into account any extension of time within which to file) all Tax Returns required to be filed by it and all such filed Tax Returns are complete and accurate; (ii) has paid or accrued all Taxes that are required to be paid or accrued and has withheld from amounts owing to any employee, creditor or third party all amounts that the Company is obligated to withhold, except in each case with respect to matters contested in good faith; and (iii) has not waived any statute of limitations with respect to Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. As of the date hereof, there are not ongoing or, to the knowledge of the Company threatened in writing, any audits, examinations, investigations or other proceedings in respect of Taxes or Tax matters which could result in any tax deficiency of the Company for any taxable period ending on or before the date hereof, and the Company is not aware of any reasonable basis upon which any such deficiency would be asserted. There are no liens on any of the Company's assets that arose in connection with any failure (or alleged failure) to pay any Tax other than liens for Taxes not yet due or being contested in good faith by appropriate proceedings. The Company has never been a party to the filing of an affiliated, combined, consolidated or unitary Tax Return. No closing agreements, private letter rulings, technical advice memoranda or similar agreements or rulings have been entered into or issued by any taxing authority with respect to the Company. Except as set forth in the Company Disclosure Schedule, the Company will not, as a result of the transactions contemplated by this Agreement, be obligated to make a payment that will not be deductible under Section 280G of the Code. The Company has made available to Parent true and correct copies of the United States federal income Tax Returns filed by the Company for each of the fiscal years ended December 31, 1997 and 1998. The Company has not been audited by any Governmental Entity in respect of Taxes or Tax matters. The Company does not have any liability with respect to income, franchise or similar Taxes that accrued on or before the Balance Sheet Date in excess of the amounts accrued with respect thereto that are reflected in the Financial Statements. (n) Labor Matters. The Company is not a party to or otherwise bound by any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor is the Company the subject of any proceeding asserting that the Company has committed an unfair labor practice or is seeking to compel it to bargain with any labor union or labor organization nor is there pending or, to the knowledge of the Company, threatened, nor has there been, since the date of the Company's formation, any labor strike, dispute, walk-out, work stoppage, slow-down or lockout involving the Company. A-20 127 (o) Insurance. (i) The Company has delivered to Parent true and complete copies of all policies of insurance to which the Company is a party or under which any director of the Company is insured. (ii) All insurance policies maintained by the Company are with reputable insurance carriers, provide full and adequate coverage for all normal risks incident to the business of the Company and its properties and assets. (iii) The Company has paid all premiums due, and has otherwise performed all of its obligations under each insurance policy to which the Company is a party or that provides coverage to any director of the Company and all such insurance policies shall continue in full force and effect following the consummation of the transactions contemplated by this Agreement. (p) Intellectual Property. (i) Set forth in Schedule 6.1(p)(i) of the Company Disclosure Schedule is a complete list of each of the following items (A) all patents and applications therefor, registrations of trademarks (including service marks) and applications therefor, and registrations of copyrights and applications therefor that are owned by the Company or licensed to the Company (collectively, "Company Intellectual Property Rights"), (B) all licenses, sublicenses, agreements and contracts relating to the Company Intellectual Property pursuant to which the Company is entitled to use any Company Intellectual Property owned by any third party ("Third Party Intellectual Property Licenses") excluding commercially available end-user computer software licenses, where the total license fees for such software do not exceed $10,000 per license per calendar year, used in the normal course of business ("Commercial Software Licenses") and (C) all agreements under which the Company has granted any third party the right to use any Company Intellectual Property. (ii) To the knowledge of the Company, excluding Commercial Software Licenses the Company is the owner of all intellectual property, including, without limitation, all Company Intellectual Property Rights, patents and patent applications, supplementary protection certificates and patent extensions, trademarks and trademark applications, service mark and service mark registrations, logos, commercial symbols, business name registrations, trade names, copyrights and copyright registrations, computer software, mask works and mask work registration applications, industrial designs and applications for registration of such industrial designs, including, without limitation, any and all applications for renewal, extensions, reexaminations and reissues of any of the foregoing intellectual property rights where applicable, inventions, biological materials, trade secrets, formulae, know-how, technical information, research data, research raw data, laboratory notebooks, procedures, designs, proprietary technology and information held or used in the business of the Company (the "Company Intellectual Property"). (iii) To the knowledge of the Company, (a) the Company is the sole legal and beneficial owner of all the Company Intellectual Property (except for Company Intellectual Property that is the subject of any Third Party Intellectual Property Licenses or the Commercial Software Licenses) and (b) all Company Intellectual Property is valid and subsisting. (iv) The Company has not entered into any agreements, licenses or created any Encumbrances, leases, equities, options, restrictions, rights of first refusal, title retention agreements or other exceptions to title which affect the Company Intellectual Property or restrict the use by the Company of the Company Intellectual Property in any way. (v) The Company is in compliance in all respects with Third Party Intellectual Property Licenses. (vi) The Company is not, and will not be as a result of the execution, delivery or performance of this Agreement or the consummation of the Merger or the other transactions contemplated hereby A-21 128 in breach, violation or default of any Third Party Intellectual Property Licenses. The rights of the Company to the Company Intellectual Property will not be affected by the execution, delivery or performance of this Agreement or the consummation of the Merger or the other transactions contemplated hereby. (vii) The Company has the right to license to third parties the use of Company Intellectual Property Rights. (viii) All registrations and filings relating to Company Intellectual Property Rights are in good standing. All maintenance and renewal fees necessary to preserve the rights of the Company in respect of Company Intellectual Property Rights have been made. The registrations and filings relating to Company Intellectual Property Rights are proceeding and there are no facts of which the Company has knowledge which could significantly undermine those registrations or filings or reduce to a significant extent the scope of protection of any patents arising from such applications beyond that which ordinarily might occur in a patent prosecution proceeding. (ix) The manufacturing, marketing, distribution or sale of any product currently manufactured, marketed, distributed or sold by, or identified for development by, the Company, licensees or sublicensees in the countries where the Company has conducted or proposes to conduct such activities, to the knowledge of the Company, does not and would not infringe, induce infringement or contributorily infringe the patents, patent applications, trademarks, trademark applications, service marks, service mark applications, copyrights, copyright applications, and proprietary trade names, publication rights, computer programs (including source code and object code), inventions, know- how, trade secrets, technology, processes, confidential information and all other intellectual property rights throughout the world (collectively, "Intellectual Property Rights") of any third party. (x) To the knowledge of the Company, there are no allegations, claims or proceedings instituted or pending which challenge the rights possessed by the Company to use the Company Intellectual Property or the validity or effectiveness of the Company Intellectual Property, including without limitation any interferences, oppositions, cancellations or other contested proceedings. (xi) To the knowledge of the Company, there are no outstanding claims or proceedings instituted or pending by any third party challenging the ownership, priority, scope or validity or effectiveness of any Company Intellectual Property. (xii) To the knowledge of the Company, there are no Intellectual Property Rights of any third party that would be infringed by the continued practice of any technologies previously used or presently in use by the Company. (xiii) To the knowledge of the Company, there is no unauthorized use, infringement or misappropriation of the Company Intellectual Property by any third party, including any employee or former employee of the Company. (xiv) The Company has not granted any licenses, immunities, options or other rights to the Company Intellectual Property which could provide a third party with a defense to patent infringement proceedings, whether domestic or foreign. (xv) The Company has taken commercially reasonable measures to maintain the confidentiality of the inventions, trade secrets, formulae, know-how, technical information, research data, research raw data, laboratory notebooks, procedures, designs, proprietary technology and information of the Company, and all other information the value of which to the Company is contingent upon maintenance of the confidentiality thereof. Without limiting the generality of the foregoing, (A) each employee of the Company and each consultant to the Company who has had access to proprietary information with respect to the Company has entered into an agreement suitable to vest ownership rights to any inventions, creations, developments, and works in the Company and has entered into an A-22 129 agreement for maintaining the confidential information of the Company and (B) each officer and director of the Company has entered into an agreement to maintain the confidential information of the Company, except for those individuals listed in Schedule 6.1(p)(xv) of the Company Disclosure Schedule whose involvement in the business of the Company is described with specificity therein. (q) Year 2000 Compliance. (i) Items of hardware, software, firmware or embedded processes ("Systems") that are a part of, or are used in connection with, the business of the Company will be Year 2000 Compliant by December 31, 1999, (disregarding insurance or similar coverage or plans for making such Systems Year 2000 Compliant). (ii) Based upon a reasonable inquiry of substantial suppliers, customers and service providers of the Company, to the knowledge of the Company, no supplier, customer or service provider of the Company will be unable to ensure that its Systems are Year 2000 Compliant. (r) Title to Properties; Encumbrances. The Company does not own any real property. Schedule 6.1(r) of the Company Disclosure Schedule contains a complete and accurate list of all real property leases to which the Company is a party. The Company owns (i) all of the properties and assets (whether real, personal, or mixed and whether tangible or intangible) that it purports to own, including all of the properties and assets reflected in the Financial Statements and (ii) all of the properties and assets purchased or otherwise acquired by the Company since the Balance Sheet Date, except for personal property acquired and sold since such date in the ordinary course of business and consistent with past practice, which subsequently purchased or acquired properties and assets are listed in Schedule 6.1(r) of the Company Disclosure Schedule. All of the aforementioned properties and assets, taken together, are the only properties and assets used in conducting the businesses of the Company, and such properties and assets are adequate for the continued operation of such businesses after the Closing in substantially the same manner as conducted to the date hereof. All properties and assets reflected in the Financial Statements are free and clear of all Encumbrances except as reflected in the Financial Statements or Schedule 6.1(r) of the Company Disclosure Schedule. (s) Contracts. Schedule 6.1(s) of the Company Disclosure Schedule lists the following Contracts to which the Company is a party on the date hereof: (i) any agreement the performance of which involved aggregate consideration in excess of $25,000.00 during 1998 or 1999; (ii) any Contract of the Company the performance of which involved aggregate consideration in excess of $250,000.00; (iii) any employment agreement; (iv) any agreement which relates to indebtedness owed by the Company, or the guarantee thereof excluding purchases of parts or equipment in the ordinary course of the Company's business consistent with past practice; (v) all broker, distributor, dealer, manufacturer's representative, franchise, agency, sales promotion, market research, marketing consulting and advertising Contracts and agreements to which the Company is a party; (vi) all Contracts with independent contractors or consultants to which the Company is a party and which are not cancellable without penalty or further payment and without more than 30 days' notice; (vii) all Contracts with any Governmental Entity to which the Company or its Subsidiary is a party; (viii) all Contracts that limit or purport to limit the ability of the Company to compete in any line of business or with any Person or in any geographic area or during any period of time; A-23 130 (ix) all Contracts between or among the Company and any senior executive officer or director of the Company; (x) all Contracts to which the Company is expressly subject by the terms of the Contract to confidentiality obligations; and (xi) any other Contracts which are material to the Company the absence of which would have a Company Material Adverse Effect. Except for those Contracts specified on the Company Disclosure Schedule as Contracts under clause (x) above, the Company has made available to Parent a correct and complete copy of each Contract listed in Schedule 6.1(s) of the Company Disclosure Schedule, together with any and all amendments or modifications thereto. Each such Contract is valid, binding, enforceable, and in full force and effect, the Company is not in breach or default under any such Contract and to the knowledge of the Company no event has occurred which, with or without notice or lapse of time or both, would constitute a breach or default, or permit termination, modification, or acceleration, under such Contract. (t) Condition and Sufficiency of Assets. The buildings, plants, structures and equipment of the Company are structurally sound, are in good operating condition and repair, and are adequate for the uses to which they are being put, and none of such buildings, plants, structures or equipment is in need of maintenance or repairs except for ordinary, routine maintenance and repairs. The building, plants, structures and equipment of the Company are sufficient for the continued operation of the Company's businesses after the Closing in substantially the same manner as conducted to the date hereof. To the knowledge of the Company, the Company has all easements, rights of way and other real property rights which are necessary for the ownership, use and operation of its properties, assets and business. (u) Certain Payments. No director, officer, agent, or employee of the Company, or any other Person associated with or acting for or on behalf of the Company, has directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or other payment to any Person, private or public, regardless of form, whether in money, property, or services (i) to obtain favorable treatment in securing business or (ii) in violation of any Law, or (b) established or maintained any fund or asset that has not been recorded in the books and records of the Company. (v) Disclosure. (i) No representation or warranty of the Company contained in this Agreement or the Company Disclosure Schedule contains any untrue statement of a material fact, or omits to state any material fact, which is required to be stated herein or therein, or is necessary, in order to make the statements contained herein or therein not misleading. (ii) There is no fact known to the Company that has specific application to the Company (other than general economic or industry conditions) and that adversely affects the assets, business, prospects, financial condition, or results of operations of the Company that has not been set forth in this Agreement or the Company Disclosure Schedule. (w) Books and Records. The books of account, minute books, stock record books, and other records of the Company, all of which have been made available to Parent, are complete and correct, in all material respects, and have been maintained in accordance with sound business practices. The minute books of the Company contain accurate and complete records, in all material respects, of all meetings held by, and corporate action taken by, the stockholders, the boards of directors, and committees of the boards of directors of the Company, and no meeting of any such stockholders, board of directors or committee has been held where material matters were approved, voted upon or acted upon for which minutes have not been prepared and are not contained in such minute books. At the Closing, all of such books and records shall be in the possession of the Company. A-24 131 (x) Brokers and Finders. Neither the Company nor any of its officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders, fees in connection with the Merger or the other transactions contemplated in this Agreement or the Stock Option Agreement. 6.2. Representations and Warranties of Parent and Merger Sub. Parent and Merger Sub each hereby represent and warrant to the Company that, except as set forth in a correspondingly numbered schedule in the Parent Disclosure Schedule: (a) Capitalization of Parent and Merger Sub. (i) The authorized capital stock of Parent consists of 75,000,000 shares of Common Stock, par value $0.01 per share, of which 25,723,402 shares were issued and outstanding as of September 8, 1999, and 5,000,000 shares of Preferred Stock, par value $0.01 per share, of which no shares were issued and outstanding as of such date. All outstanding shares of Parent Common Stock are duly authorized, validly issued, fully paid and non-assessable and are not subject to preemptive rights created by statute, the Certificate of Incorporation or By-laws of Parent ("Parent's Organizational Documents") or any agreement or document to which Parent is a party or by which it is bound. (ii) The authorized capital stock of Merger Sub consists of 1,000 shares of Common Stock, par value $1.00 per share, all of which are validly issued and outstanding. All of the issued and outstanding capital stock of Merger Sub is, and at the Effective Time will be, owned by Parent, and there are (i) no other shares of capital stock or voting securities of Merger Sub, (ii) no securities of Merger Sub convertible into or exchangeable for shares of capital stock or voting securities of Merger Sub and (iii) no options or other rights to acquire from Merger Sub, and no obligations of Merger Sub to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of Merger Sub. Merger Sub was formed for the specific purpose of consummating the transactions contemplated by this Agreement, has not conducted any business prior to the date hereof and has no, and prior to the Effective Time will have no, assets, liabilities or obligations of any nature other than those incident to its formation and pursuant to this Agreement and the Merger and the other transactions contemplated by this Agreement. (b) Organization, Good Standing and Qualification. Each of Parent and Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of organization and has all requisite corporate or similar power and authority to own and operate its properties and assets and to carry on its business as presently conducted and is qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the ownership or operation of its properties or conduct of its business requires such qualification. Parent has made available to the Company a complete and correct copy of Parent's Organizational Documents, each as amended to, and in full force as of, the date hereof. (c) Corporate Authority. (i) No vote of holders of capital stock of Parent is necessary to approve this Agreement and the Merger and the other transactions contemplated hereby. Each of the Parent and Merger Sub has all requisite corporate power and authority and has taken all corporate action necessary in order to execute, deliver and perform its obligations under this Agreement and to consummate the Merger. This Agreement is a valid and binding agreement of Parent and Merger Sub, enforceable against each of Parent and Merger Sub in accordance with its terms, subject to the Bankruptcy and Equity Exception. (ii) Prior to the Effective Time, Parent will have taken all necessary action to permit it to issue the number of shares of Parent Common Stock required to be issued pursuant to Article V. The A-25 132 Parent Common Stock, when issued, will be validly issued, fully paid and nonassessable, and free of any preemptive right of subscription or purchase in respect thereof. (d) Governmental Filings; No Violations. (i) Except for (A) the filing of the Massachusetts Articles of Merger pursuant to Section 2.3, (B) filings and/or notices under the HSR Act, the Securities Act and the Exchange Act, (C) such consents, approvals, orders and authorizations as may be required under applicable state securities or "blue sky" laws and (D) filings and/or notices required to be made with NASDAQ, no notices, reports or other filings are required to be made by Parent or Merger Sub with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained by Parent or Merger Sub from, any Governmental Entity, in connection with the execution and delivery of this Agreement by Parent and Merger Sub and the consummation by Parent and Merger Sub of the Merger and the other transactions contemplated hereby. Schedule 6.2(d) of the Parent Disclosure Schedule sets forth a correct and complete list of Contracts of Parent or Parent Companies pursuant to which waivers or consents may be required prior to consummation of the transactions contemplated by this Agreement. (ii) The execution, delivery and performance of this Agreement by Parent and Merger Sub do not, and the consummation by Parent and Merger Sub of the Merger and the other transactions contemplated hereby will not, constitute or result in (A) a breach or violation of, or a default under, the Organizational Documents of Parent and Merger Sub, (B) a breach or violation of, or a default under, the acceleration of any obligations or the creation of any Encumbrance on the assets of Parent or any of its Subsidiaries (with or without notice, lapse of time or both) pursuant to, any Contracts binding upon Parent or any of its Subsidiaries or any Law or governmental or non-governmental permit or license to which Parent or any of its Subsidiaries is subject or (C) any change in the rights or obligations of any party under any of the Contracts binding upon Parent. (e) Parent Reports; Financial Statements. Parent has made available to the Company (i) Parent's Annual Report on Form 10-K for the year ended December 31, 1998, (ii) Parent's Quarterly Reports on Form 10-Q for the periods ended March 31, 1999 and June 30, 1999 and (iii) Parent's registration statements on Form S-3 since December 31, 1998 each in the form (including exhibits, annexes and any amendments thereto) filed with the SEC (collectively, including any such reports filed subsequent to the date hereof, the "Parent Reports"). Parent has timely filed, and between the date of this Agreement and the Effective Time will timely file, with the SEC all forms, documents and reports required to be filed with the SEC. As of their respective dates, the Parent Reports (i) complied in all material respects, and all reports filed by Parent with the SEC between the date of this Agreement and the Effective Time will comply in all material respects, with applicable SEC requirements and (ii) did not, and any Parent Reports filed with the SEC subsequent to the date hereof will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading. Each of the consolidated balance sheets included in or incorporated by reference into the Parent Reports (including the related notes and schedules) fairly presents, or will fairly present, the consolidated financial position of Parent and its Subsidiaries as of its date and each of the consolidated statements of income and of changes in financial position included in or incorporated by reference into the Parent Reports (including any related notes and schedules) fairly presents, or will fairly present, the results of operations, retained earnings and changes in financial position, as the case may be, of Parent and its Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to notes and normal year-end audit adjustments that will not be material in amount or effect), in each case in accordance with GAAP consistently applied during the periods involved, except as may be noted therein. (f) Accounting and Tax Matters. (i) As of the date hereof, neither Parent nor any of its Affiliates has taken or agreed to take any action, nor does Parent have any knowledge of any fact or A-26 133 circumstance, that would prevent Parent from accounting for the business combination to be effected by the Merger as a "pooling-of-interests" or prevent the Merger and the other transactions contemplated by this Agreement from qualifying as a "reorganization" within the meaning of Section 368(a) of the Code. (ii) The representations and warranties that are set forth in Parent's letter to be delivered by Parent to Ernst & Young LLP in connection with section 8.1(e) are hereby adopted as if such representations and warranties were fully set forth herein; provided, that no representation or warranty is made to the extent such representation or warranty relates in any respect to the Company. (g) No Parent Material Adverse Effect. Except as set forth in the Parent Reports, since June 30, 1999 there has not been any change in the financial condition, business or results of operations of Parent or any development or combination of developments that is reasonably likely to have a Parent Material Adverse Effect; it being understood among the parties to this Agreement, that for purposes of this Section 6.2(g), any change in the trading price of the shares of Parent Common Stock, or change in financial or economic markets which effects the trading price on the NASDAQ of the shares of Parent Common Stock shall not be considered when determining if a Parent Material Adverse Effect has occurred. (h) Brokers and Finders. Neither Parent nor any of its officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders, fees in connection with the Merger or the other transactions contemplated by this Agreement. ARTICLE VII COVENANTS 7.1. Interim Operations of the Company. The Company covenants and agrees that, after the date hereof and prior to the Effective Time (unless Parent shall otherwise approve in writing and except as otherwise expressly contemplated by this Agreement and the Stock Option Agreement): (a) except as specifically provided in Section 7.1(a) of the Company Disclosure Schedule, the business of the Company shall be conducted in the ordinary and usual course and, to the extent consistent therewith, it shall use its commercially reasonable best efforts to preserve its business organization intact and maintain its existing relations and goodwill with customers, suppliers, distributors, creditors, lessors, employees and business associates; (b) it shall not (i) amend its Organizational Documents; (ii) split, combine or reclassify its outstanding shares of capital stock; (iii) declare, set aside or pay any dividend payable in cash, stock or property in respect of any capital stock; or (iv) repurchase, redeem or otherwise acquire any shares of its capital stock or any securities convertible into or exchangeable or exercisable for any shares of its capital stock; (c) it shall not (i) issue, sell, pledge, dispose of or encumber any shares of, or securities convertible into or exchangeable or exercisable for, or options, warrants, calls, commitments or rights of any kind to acquire, any shares of its capital stock of any class or any Voting Debt or any other property or assets (other than Shares issuable pursuant to (A) outstanding options on the date hereof under the Stock Plan, (B) Outstanding Warrants or (C) Company Options issued in the ordinary and usual course of business between the date of this Agreement and the Effective Time); (ii) other than in the ordinary and usual course of business, transfer, lease, license, guarantee, sell, mortgage, pledge, dispose of or encumber any other property or assets or incur or modify any material indebtedness or other liability; provided, however, that the Company may borrow funds from a bank or other financial lending institution for general working capital purposes not to exceed $250,000 in the aggregate for non-inventory expenditures A-27 134 and $500,000 in the aggregate for non-inventory and inventory expenditures taken together; (iii) make or authorize or commit for any capital expenditures, other than in the ordinary course of business and pursuant to the calendar years 1999 and 2000, capital appropriations/spending budgets set forth in the Company Disclosure Schedule, and in no event shall any capital expenditures exceed $50,000 individually or $200,000 in the aggregate; or (iv) by any means, make any acquisition of, or investment in, assets or stock of any other Person or entity; (d) it shall not terminate, establish, adopt, enter into, make any new grants or awards under (except pursuant to normal advancement and promotion procedure consistent with past practice and as set forth in Schedule 7.1(d) of the Company Disclosure Schedule), amend or otherwise modify, any Compensation and Benefit Plans or increase the salary, wage, bonus or other compensation of any employees; (e) it shall not settle or compromise any material claims or litigation or, except in the ordinary and usual course of business, modify, amend or terminate any of its material Contracts or waive, release or assign any material rights or claims; (f) it shall not make any material Tax election or permit any insurance policy naming it as a beneficiary or loss-payable payee to be cancelled or terminated except in the ordinary and usual course of business; (g) it shall not change any of the accounting practices or principles used by it other than is required by GAAP if the Company makes such change pursuant to and in accordance with the written advice of Ernst & Young LLP; (h) it shall not adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company; (i) it shall not take any action or omit to take any action that would cause any of its representations and warranties herein to become untrue in any material respect; and (j) it shall not authorize or enter into an agreement to do any of the foregoing. 7.2. Acquisition Proposals. The Company agrees that neither it nor any of the officers and directors of it shall, and that it shall direct and use its best efforts to cause its employees, agents and representatives (including any investment banker, attorney or accountant retained by it) not to, directly or indirectly, initiate, solicit, encourage or otherwise facilitate any inquiries or the making of any proposal or offer with respect to a merger, reorganization, share exchange, consolidation or similar transaction involving, or any purchase of 10% or more (or any percentage that would negatively effect the ability of the Merger to qualify for pooling of interests accounting treatment) of the assets or any equity securities of, the Company (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal"). The Company further agrees that neither it nor any of the officers and directors of it shall, and that it shall direct and use its best efforts to cause its employees, agents and representatives (including any investment banker, attorney or accountant retained by it) not to, directly or indirectly, engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any Person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal; provided, however, that nothing contained in this Agreement shall prevent the Company or its Board of Directors from (i) providing information in response to a request therefor by a Person who has made an unsolicited bona fide written Acquisition Proposal if the Board of Directors receives from the Person so requesting such information an executed confidentiality agreement; (ii) engaging in any negotiations or discussions with any Person who has made an unsolicited bona fide written Acquisition Proposal; or (iii) recommending such an Acquisition Proposal to the stockholders of the Company, if and only to the extent that, (A) in each such case referred to in clause (i), (ii) or (iii) above, the Board of A-28 135 Directors of the Company determines in good faith after consultation with outside legal counsel that such action is necessary in order for its directors to comply with their respective fiduciary duties under applicable law and (B) in each case referred to in clause (ii) or (iii) above, the Board of Directors of the Company determines in good faith (after consultation with its financial advisor) that such Acquisition Proposal, if accepted, is reasonably likely to be consummated, taking into account all legal, financial and regulatory aspects of the proposal and the Person making the proposal and would, if consummated, result in a transaction more favorable to the Company's stockholders from a financial point of view than the transaction contemplated by this Agreement (any such more favorable Acquisition Proposal being referred to in this Agreement as a "Superior Proposal"). The Company agrees that it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties, other than Parent or Merger Sub, conducted heretofore with respect to any Acquisition Proposal. The Company agrees that it will take the necessary steps to promptly inform the individuals or entities referred to in the first sentence hereof of the obligations undertaken in this Section 7.2. The Company agrees that it will notify Parent immediately if any such inquiries, proposals or offers are received by, any such information is requested from, or any such discussions or negotiations are sought to be initiated or continued with, any of its representatives indicating, in connection with such notice, the name of such Person and the material terms and conditions of any proposals or offers and thereafter shall keep Parent informed, on a current basis, on the status and terms of any such proposals or offers and the status of any such discussions or negotiations. The Company also agrees that it will promptly request each Person that has heretofore executed a confidentiality agreement in connection with its consideration of acquiring it to return all confidential information heretofore furnished to such Person by or on behalf of it. 7.3. Information Supplied. The Company and Parent each agrees that none of the information supplied or to be supplied by it for inclusion or incorporation by reference in (i) the Registration Statement on Form S-4 to be filed with the SEC by Parent in connection with the issuance of shares of Parent Common Stock in the Merger (including the proxy statement and prospectus (the "Prospectus/Proxy Statement") constituting a part thereof) (the "S-4 Registration Statement") will, at the time the S-4 Registration Statement becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) the Prospectus/Proxy Statement and any amendment or supplement thereto will, at the date of mailing to stockholders and at the times of the meetings of stockholders of the Company to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 7.4. Stockholders Meeting. The Company shall take, in accordance with applicable law and its Organizational Documents, all action necessary to convene a meeting of holders of Shares (the "Stockholders Meeting") as promptly as practicable after the S-4 Registration Statement is declared effective to consider and vote upon the approval of this Agreement. Subject to fiduciary obligations under applicable law, the Company's board of directors shall recommend such approval and shall take all lawful action to solicit such approval. 7.5. Filings; Other Actions. (a) Parent and the Company shall prepare and file with SEC the Prospectus/Proxy Statement and the S-4 Registration Statement as promptly as practicable after the date hereof. Parent and the Company each shall use its commercially reasonable best efforts to have the S-4 Registration Statement declared effective under the Securities Act as promptly as practicable after such filing, and promptly thereafter mail the Prospectus/Proxy Statement, to the stockholders of the Company. Parent shall also use its commercially reasonable best efforts to obtain all necessary state securities law or "blue sky" permits and approvals required in connection with the Merger and A-29 136 to consummate the other transactions contemplated by this Agreement and the Stock Option Agreement and shall pay all expenses incident thereto. (b) The Company and Parent each shall use its commercially reasonable best efforts (which efforts shall include, without limitation, the execution of customary representation letters) to cause to be delivered to the other party and its directors a letter of its independent auditors, dated (i) the date on which the S-4 Registration Statement shall become effective and (ii) the Closing Date, and addressed to the other party and its directors, in form and substance customary for "comfort" letters delivered by independent public accountants in connection with registration statements similar to the S-4 Registration Statement. (c) The Company and Parent shall cooperate with each other and use (and shall cause their respective Subsidiaries to use) their respective commercially reasonable best efforts to take or cause to be taken all actions, and do or cause to be done all things, necessary, proper or advisable on its part under this Agreement, the Stock Option Agreement and applicable Laws to consummate and make effective the Merger and the other transactions contemplated by this Agreement and the Stock Option Agreement as soon as practicable, including preparing and filing as promptly as practicable all documentation to effect all necessary notices, reports and other filings and to obtain as promptly as practicable all consents, registrations, approvals, permits and authorizations necessary or advisable to be obtained from any third party and/or any Governmental Entity in order to consummate the Merger or any of the other transactions contemplated by this Agreement and the Stock Option Agreement; provided, however, that nothing in this Section 7.5 shall require, or be construed to require, Parent to proffer to, or agree to, sell or hold separate and agree to sell, before or after the Effective Time, any assets, businesses, or interest in any assets or businesses of Parent, the Company or any of their respective Affiliates (or to consent to any sale, or agreement to sell, by the Company of any of its assets or businesses) or to agree to any material changes or restriction in the operations of any such assets or businesses. Subject to applicable laws relating to the exchange of information, Parent and the Company shall have the right to review in advance, and to the extent practicable each will consult the other on, all the information relating to Parent or the Company, as the case may be, and any of their respective Subsidiaries, that appear in any filing made with, or written materials submitted to, any third party and/or any Governmental Entity in connection with the Merger and the other transactions contemplated by this Agreement and the Stock Option Agreement. In exercising the foregoing right, each of the Company and Parent shall act reasonably and as promptly as practicable. (d) The Company and Parent each shall, upon request by the other, furnish the other with all information concerning itself, its directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with the S-4 Registration Statement, Prospectus/ Proxy Statement, or any other statement, filing, notice or application made by or on behalf of Parent, the Company or any of their respective Subsidiaries to any third party and/or any Governmental Entity in connection with the Merger and the transactions contemplated by this Agreement and the Stock Option Agreement. (e) The Company and Parent each shall keep the other apprised of the status of matters relating to completion of the transactions contemplated hereby, including promptly furnishing the other with copies of notice or other communications received by Parent or the Company, as the case may be, from any third party and/or any Governmental Entity with respect to the Merger and the other transactions contemplated by this Agreement and the Stock Option Agreement. The Company and Parent each shall give prompt notice to the other of any development or combination of developments that, individually or in the aggregate, is reasonably likely to result in a material adverse effect on the financial condition, properties, prospects, business or results of operations of the Company or Parent, as applicable. A-30 137 7.6. Taxation and Accounting. Neither Parent nor the Company shall take or cause to be taken any action, whether before or after the Effective Time, that would disqualify the Merger as a "pooling of interests" for accounting purposes or as a "reorganization" within the meaning of Section 368(a) of the Code. Each of the parties shall report the Merger for income tax purposes as a reorganization within the meaning of Section 368(a) of the Code (and any comparable state or local tax statute). Each of Parent and the Company shall make and use its commercially reasonable best efforts to obtain from its Affiliates such reasonable representations as may be requested by legal counsel for the purpose of rendering the opinions contemplated by Section 8.1(g). 7.7. Access. Upon reasonable notice and subject to the requirements of the confidentiality provisions of those Contracts set forth on Schedule 6.1(s) of the Company Disclosure Schedule that are specifically described on such Schedule 6.1(s) as containing confidentiality provisions, the Company shall afford Parent's officers, employees, counsel, accountants and other authorized representatives ("Representatives") reasonable access, during normal business hours throughout the period prior to the Effective Time, to its properties, books, contracts and records and, during such period, the Company shall furnish promptly to Parent all information concerning the Company's business, properties and personnel as may reasonably be requested. All requests for information made pursuant to this Section shall be directed to an executive officer of the Company, or such Person as may be designated by the Company. 7.8. Affiliates. (a) At least 10 days prior to the date of the Stockholders Meeting, the Company shall deliver to Parent a list of names and addresses of those Persons who are, as of the time of the Stockholders Meeting referred to in Section 7.4, Affiliates of the Company within the meaning of Rule 145 under the Securities Act and for the purposes of applicable interpretations regarding the pooling-of-interests method of accounting. The Company shall provide to Parent such information and documents as Parent shall reasonably request for purposes of reviewing such list. There shall be added to such list the names and addresses of any other Person subsequently identified by either Parent or the Company as a Person who may be deemed to be such an affiliate of the Company; provided, however, that no such Person identified by Parent shall be added to the list of affiliates of the Company if Parent shall receive from the Company, on or before the date of the Stockholders Meeting, an opinion of counsel reasonably satisfactory to Parent to the effect that such Person is not such an affiliate. The Company shall exercise its commercially reasonable best efforts to deliver or cause to be delivered to Parent, prior to the date of the Stockholders Meeting, from each affiliate of the Company identified in the foregoing list (as the same may be supplemented as aforesaid), a letter dated as of the Closing Date substantially in the form attached as Exhibit A-1 (the "Affiliates Letter"). Parent shall not be required to maintain the effectiveness of the S-4 Registration Statement or any other registration statement under the Securities Act for the purposes of resale of Parent Common Stock received in the Merger and the certificates representing Parent Common Stock received by such Affiliates shall bear a customary legend regarding applicable Securities Act restrictions and the provisions of this Section. (ii) Prior to the date of the Effective Time, Parent shall deliver to the Company a list of names and addresses of those Persons who are, in the opinion of the Parent, Affiliates of Parent for the purposes of applicable interpretations regarding the pooling-of-interests method of accounting. Parent shall provide to the Company such information and documents as the Company shall reasonably request for purposes of reviewing such list. There shall be added to such list the names and addresses of any other Person the Company reasonably identifies (by written notice to Parent within ten business days after the Company's receipt of such list) as being a Person who may be deemed to be such an affiliate of Parent; provided, however, that no such Person identified by the Company shall be added to the list of affiliates of Parent if the Company shall receive from Parent, on or before the date of the Stockholders Meeting, an opinion of counsel reasonably satisfactory to the Company to the effect that such Person is not such an affiliate. Parent shall exercise its commercially reasonable A-31 138 best efforts to deliver or cause to be delivered to the Company, prior to the date of the Effective Time, from each of such affiliates of Parent identified in the foregoing list (as the same may be supplemented as aforesaid), a letter dated as of the Closing Date substantially in the form attached as Exhibit A-2 (the "Pooling Affiliates Letter"). 7.9. Quotation of Parent Common Stock. Parent shall file the appropriate notification form for the quotation of additional shares together with the applicable fee covering the Parent Common Stock to be issued in the Merger with the NASDAQ prior to the Effective Time. 7.10. Publicity. Parent shall control and coordinate the press relations and publicity activities of the parties in connection with the Merger. The Company shall consult with Parent with respect to issuing any press releases or otherwise making public announcements with respect to the Merger and the other transactions contemplated by this Agreement and the Stock Option Agreement and will not issue any press releases or otherwise make any public announcements with respect thereto without Parent's prior consent. 7.11. Benefits. (a) Stock Options. (i) At the Effective Time, each outstanding Company Option under the Stock Plan, whether vested or unvested, shall be deemed to constitute an option to acquire (a "New Parent Option"), on the same terms and conditions as were applicable under such Company Option, the same number of shares of Parent Common Stock (rounded down to the nearest whole number) as the holder of such Company Option would have been entitled to receive pursuant to the Merger had such holder exercised such option in full immediately prior to the Effective Time, at an exercise price per share (rounded up to the nearest whole cent) equal to (y) the aggregate exercise price for the Shares otherwise purchasable pursuant to such Company Option divided by (z) the number of full shares of Parent Common Stock deemed purchasable pursuant to such Company Option in accordance with the foregoing; provided, however, that in the case of any Company Option to which Section 422 of the Code applies, the option price, the number of shares purchasable pursuant to such option and the terms and conditions of exercise of such option shall be determined in accordance with the foregoing, subject to such adjustments as are necessary in order to satisfy the requirements of Section 424(a) of the Code. At or prior to the Effective Time, the Company shall take all necessary actions to permit the assumption of the unexercised Company Options by Parent pursuant to this Section. (ii) Effective at the Effective Time, Parent shall assume, as a New Parent Option, each outstanding Company Option in accordance with this Section and with the terms of the Stock Plan under which it was issued and the stock option agreement by which it is evidenced. Not later than 60 days after the Closing Date, Parent shall file a registration statement under the Securities Act on Form S-8, or other appropriate form, covering shares of Parent Common Stock subject to such New Parent Options. (iii) In connection with Parent's assumption of Company Options in accordance with the terms of the Stock Plan, Parent shall reserve a sufficient number of shares of Parent Common Stock for issuance with respect to New Parent Options. (b) Employee Benefits. Parent agrees that, during the period commencing at the Effective Time and ending on the first anniversary thereof, the employees of the Company shall continue to be provided with benefits under employee benefit plans (other than plans involving the issuance of Shares) that are no less favorable in the aggregate than those currently provided by the Company to such employees. Parent will cause such employee benefit plans to take into account for purposes of eligibility and vesting thereunder service by employees of the Company as if such service were with Parent. Parent shall, and shall cause the Surviving Corporation to, honor all employee benefit obligations to current and former employees under the Compensation and Benefit Plans and all A-32 139 employee severance plans (or policies) in existence on the date hereof and all employment or severance agreements entered into by the Company or adopted by the board of directors of the Company prior to the date hereof. 7.12. Expenses; Cash Paid to Dissenting Stockholders. The Surviving Corporation shall pay all charges and expenses, including those of the Exchange Agent, in connection with the transactions contemplated in Article V, and Parent shall reimburse the Surviving Corporation for such charges and expenses. Except as otherwise provided in Section 9.5(b), whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the other agreements set forth herein and the Merger and the other transactions contemplated by this Agreement and the other agreements set forth herein shall be paid by the party incurring such expense; provided, however, Parent shall pay all expenses incurred in connection with the filing fee for the S-4 Registration Statement and printing and mailing the Prospectus/Proxy Statement and any other expenses relating to the S-4 Registration Statement. All cash required to make payments to Dissenting Stockholders in respect of Dissenting Shares shall originate with Parent. 7.13. Takeover Statutes. If any Takeover Statute is or may become applicable to the Merger or the other transactions contemplated by this Agreement, the Stock Option Agreement or the Stockholder Voting Agreements, each of Parent and the Company and its board of directors shall grant such approvals and take such actions as are necessary so that such transactions may be consummated as promptly as practicable on the terms contemplated by this Agreement, the Stock Option Agreement, the Stockholder Voting Agreements or by the Merger and otherwise act to eliminate or minimize the effects of such statute or regulation on such transactions. 7.14. Warrants. Prior to the Effective Time, the Company and Parent shall take all action necessary to provide that on and after the Effective Time the Warrants shall be exercisable only for the Merger Consideration. 7.15. Assignment of Contracts. At the Effective Time, the Company shall assign those non-competition and non-solicitation Contracts that the Company has entered into with its employees, as Parent may request. ARTICLE VIII CONDITIONS 8.1. Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to effect the Merger is subject to the satisfaction or waiver at or prior to the Effective Time of each of the following conditions: (a) Stockholder Approval. This Agreement shall have been duly approved by holders of Shares constituting the Company Requisite Vote as set forth in Section 6.1(c) and shall have been duly approved by the sole stockholder of Merger Sub in accordance with applicable law and the Organizational Documents of each such corporation. (b) NASDAQ Quotation. The appropriate notification form for quotation of the shares of Parent Common Stock issuable to the Company stockholders pursuant to this Agreement shall have been filed with the NASDAQ and the applicable fee, in connection therewith, shall have been paid by Parent. (c) Regulatory Consents. The waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated and, other than the filing provided for in Section 2.3, all notices, reports and other filings required to be made prior to the Effective Time by the Company or Parent with, and all consents, registrations, approvals, permits and authorizations required to be obtained prior to the Effective Time by the Company or Parent A-33 140 from, any Governmental Entity in connection with the execution and delivery of this Agreement and the consummation of the Merger and the other transactions contemplated hereby by the Company, Parent and Merger Sub shall have been made or obtained (as the case may be). (d) Litigation. No court or Governmental Entity of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, law, ordinance, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) that is in effect and restrains, enjoins or otherwise prohibits consummation of the Merger or the other transactions contemplated by this Agreement (collectively, an "Order"), and no Governmental Entity or any other Person shall have instituted any proceeding or threatened to institute any proceeding seeking any such Order. (e) Accountant Letter. Parent and the Company shall have received a letter, dated as of the Closing Date, from Ernst & Young LLP regarding the appropriateness of pooling of interests accounting for the Merger under Accounting Principles Board Opinion No. 16 if closed and consummated in accordance with this Agreement. (f) S-4 Registration Statement. The S-4 Registration Statement shall have become effective under the Securities Act. No stop order suspending the effectiveness of the S-4 Registration Statement shall have been issued, and no proceedings for that purpose shall have been initiated or be threatened, by the SEC. (g) Tax Opinions. Parent and the Company shall each have received substantially identical written opinions from their counsel, Sullivan & Cromwell and Palmer & Dodge LLP, respectively, dated the Closing Date, to the effect that the Merger will be treated for Federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code, and that each of Parent, Merger Sub and the Company will be a party to that reorganization within the meaning of Section 368(b) of the Code. 8.2. Conditions to Obligations of Parent and Merger Sub. The obligations of Parent and Merger Sub to effect the Merger are also subject to the satisfaction or waiver by Parent at or prior to the Effective Time of the following conditions: (a) Representations and Warranties. The representations and warranties of the Company, the stockholders set forth on the signature pages of this Agreement, and the Stockholder Representative (on behalf of the stockholders of the Company) set forth in this Agreement shall be true and correct in all respects as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent any such representation or warranty expressly speaks as of an earlier date); unless the failure of any such representation or warranty to be so true and correct, has not had or is not reasonably likely to have, a Company Material Adverse Effect, and Parent shall have received a certificate signed on behalf of the Company by the Chief Executive Officer or the President of the Company to such effect. (b) Performance of Obligations of the Company. The Company shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Parent shall have received a certificate signed on behalf of the Company by the Chief Executive Officer or the President of the Company to such effect. (c) Consents Under Agreements. Except as set forth on Schedule 8.2(c) of the Company Disclosure Schedule, the Company shall have obtained the consent or approval of each Person whose consent or approval shall be required under any material Contract to which the Company is a party. A-34 141 (d) Legal Opinion. Parent shall have received an opinion of Palmer & Dodge LLP, counsel to the Company, dated the Closing Date, substantially in the form attached hereto as Exhibit B. (e) Resignations. Parent shall have received the resignations of each director of the Company. (f) Non-competition Agreements. Parent and/or Merger Sub shall have entered into a non-competition agreement with those individuals set forth in Schedule 8.2(f) of the Company Disclosure Schedule in a form satisfactory to Parent and each of such individuals. (g) Affiliates Letters. Parent shall have received an Affiliates Letter from each Person identified as an affiliate of the Company pursuant to Section 7.8. 8.3. Conditions to Obligation of the Company. The obligation of the Company to effect the Merger is also subject to the satisfaction or waiver by the Company at or prior to the Effective Time of the following conditions: (a) Representations and Warranties. The representations and warranties of Parent and Merger Sub set forth in this Agreement shall be true and correct in all respects as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent any such representation or warranty express speaks as of an earlier date); unless the failure of any such representation or warranty to be so true and correct, has not had or is not reasonable likely to have, a Parent Material Adverse Effect, and the Company shall have received a certificate signed on behalf of Parent by an executive officer of Parent to such effect. (b) Performance of Obligations of Parent and Merger Sub. Each of Parent and Merger Sub shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and the Company shall have received a certificate signed on behalf of Parent and Merger Sub by an executive officer of Parent to such effect. (c) Consents Under Agreements. Parent shall have obtained the consent or approval of each Person whose consent or approval shall be required in order to consummate the transactions contemplated by this Agreement under any material Contract to which Parent or any of its Subsidiaries is a party. (d) Legal Opinion. The Company shall have received an opinion of the General Counsel of Parent dated the Closing Date addressing the matters set forth in Exhibit C hereto. ARTICLE IX TERMINATION 9.1. Termination by Mutual Consent. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after the approval by stockholders of the Company referred to in Section 8.1(a), by mutual written consent of the Company and Parent by action of their respective Boards of Directors. 9.2. Termination by Either Parent or the Company. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time by action of the Board of Directors of either Parent or the Company if (i) the Merger shall not have been consummated by February 15, 2000; (the "Termination Date"), (ii) the approval of the Company's stockholders required by Section 8.1(a) shall not have been obtained at a meeting duly convened therefor or at any adjournment or postponement thereof or (iii) any Order permanently restraining, enjoining or otherwise prohibiting consummation of the Merger shall become final and non-appealable (whether A-35 142 before or after the approval by the stockholders of the Company); provided, that the right to terminate this Agreement pursuant to clause (i) above shall not be available to any party that has breached in any material respect its obligations under this Agreement in any manner that shall have proximately contributed to the occurrence of the failure of the Merger to be consummated. 9.3. Termination by the Company. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after the approval by stockholders of the Company referred to in Section 8.1(a), by action of the Board of Directors of the Company: (a) if (i) the Company is not in breach of any of the terms of this Agreement, (ii) the Board of Directors of the Company authorizes the Company, subject to complying with the terms of this Agreement, to enter into a binding written agreement concerning a transaction that constitutes a Superior Proposal and the Company notifies Parent in writing that it intends to enter into such an agreement, attaching the most current version of such agreement to such notice, (iii) Parent does not make, within five business days of receipt of the Company's written notification of its intention to enter into a binding agreement for a Superior Proposal, an offer that the Board of Directors of the Company determines, in good faith after consultation with its financial advisors, is at least as favorable, from a financial point of view, to the stockholders of the Company as the Superior Proposal and (iv) the Company prior to such termination pays to Parent in immediately available funds any fees required to be paid pursuant to Section 9.5. The Company agrees (x) that it will not enter into a binding agreement referred to above until at least the sixth business day after it has provided the notice to Parent required thereby and (y) to notify Parent promptly if its intention to enter into a written agreement referred to in its notification shall change at any time after giving such notification. (b) if there has been a material breach by Parent or Merger Sub of any representation, warranty, covenant or agreement contained in this Agreement that is not curable or, if curable, is not cured within 30 days after written notice of such breach is given by the Company to the party committing such breach. 9.4. Termination by Parent. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after the approval by the stockholders of Parent referred to in Section 8.1(a), by action of the Board of Directors of Parent if (i) the Board of Directors of the Company shall have withdrawn or adversely modified its approval or recommendation of this Agreement or failed to reconfirm its recommendation of this Agreement within five business days after a written request by Parent to do so, (ii) there has been a material breach by the Company of any representation, warranty, covenant or agreement contained in this Agreement that is not curable or, if curable, is not cured within 30 days after written notice of such breach is given by Parent to the Company or (iii) if the Company or any of the other Persons described in Section 7.2 as affiliates, representatives or agents of the Company shall take any of the actions that would be proscribed by Section 7.2 but for the proviso therein allowing certain actions to be taken pursuant to clause (i), (ii) or (iii) of the proviso under the conditions set forth therein. 9.5. Effect of Termination and Abandonment. (a) In the event of termination of this Agreement and the abandonment of the Merger pursuant to this Article, this Agreement (other than the provisions of Sections 9.5, 11.4 and 11.5) shall become void and of no effect with no liability on the part of any party hereto (or of any of its directors, officers, employees, agents, legal and financial advisors or other representatives); provided, however, except as otherwise provided herein, no such termination shall relieve any party hereto of any liability or damages resulting from any breach of this Agreement. A-36 143 (b) In the event that this Agreement is terminated (x) by the Company pursuant to Section 9.3(a) or (y) by Parent pursuant to Section 9.4(i) (in connection with a Superior Proposal) or Section 9.4(iii), then the Company shall promptly, but in no event later than two days after the date of such termination, pay Parent a termination fee of $2,500,000 and shall promptly, but in no event later than two days after being notified of such by Parent, pay all of the charges and expenses, including those of the Exchange Agent, incurred by Parent or Merger Sub in connection with the Transaction Agreements and the transactions contemplated by the Transaction Agreements up to a maximum amount of $1,000,000, in each case payable by wire transfer of same day funds. The Company's payment shall be the sole and exclusive remedy of Parent and Merger Sub against the Company and its directors, officers, employees, agents, advisors or other representatives with respect to the breach of any covenant or agreement giving rise to such payment; provided, however, no such payment shall relieve any party hereto of any liability or damages resulting solely from any willful breach of this Agreement. The Company acknowledges that the agreements contained in this Section 9.5(b) are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, Parent and Merger Sub would not enter into this Agreement; accordingly, if the Company fails to promptly pay the amount due pursuant to this Section 9.5(b), and, in order to obtain such payment, Parent or Merger Sub commences a suit which results in a judgment against the Company for the fee set forth in this paragraph (b), the Company shall pay to Parent or Merger Sub its costs and expenses (including attorneys' fees) in connection with such suit, together with interest (at a 10% rate) on the amount of the fee. ARTICLE X INDEMNIFICATION 10.1. Survival; Right to Indemnification Not Affected by Knowledge; Representations and Warranties Made as of the Closing Date. (a) All representations, warranties, covenants, and obligations in this Agreement, the Disclosure Schedules and any other certificate or document delivered pursuant to this Agreement shall survive for one year after the Effective Time (the "Survival Date") other than the representation and warranty contained in Section 6.2(g) which shall not survive the Effective Time. Each party's indemnification obligations, or liability obligations pursuant to Section 10.8, with respect to representations, warranties, covenants, and obligations in this Agreement, the Disclosure Schedules and any other certificate or document delivered pursuant to this Agreement shall terminate when the applicable representation, warranty, covenant, obligation terminates pursuant to this Section; provided, however, that such obligations to indemnify, or liability obligations pursuant to Section 10.8, shall not terminate with respect to a particular item as to which, before the expiration of the applicable survival period, the party (i) seeking indemnification has made a claim by delivering a notice of such claim (in accordance with the terms of this Article) to the parties from which indemnification is sought or (ii) seeking Damages in accordance with Section 10.8 has commenced legal proceedings. (b) Except as otherwise set forth in this Article X, the right to indemnification, payment of Damages or other remedy based on such representations, warranties, covenants and obligations shall not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant or obligation. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, shall not affect the right to indemnification, payment of Damages, or other remedy based on such representations, warranties, covenants, and obligations. A-37 144 (c) Notwithstanding anything herein to the contrary, the representations and warranties contained in Sections 6.1 and 6.2 of this Agreement shall, for purposes of each party's indemnification obligations and liability obligations pursuant to Section 10.8, be deemed to be made as of the date of this Agreement and as of the Closing Date (except to the extent any such representation or warranty expressly speaks of an earlier date) without regard to the exceptions set forth in the certificates delivered in connection with Sections 8.2(a) and 8.3(a). 10.2. Indemnification and Payment of Damages by Holders of Shares. The holders of Shares shall jointly and severally indemnify and hold harmless Parent and its Affiliates and each of their respective officers, directors, employees, stockholders, agents and representatives (collectively, the "Parent Indemnified Parties"), for, and shall pay to the Parent Indemnified Parties the amount of, any loss, liability, claim, damage or expense (including costs of investigation and defense and reasonable attorneys' fees), whether or not involving a third-party claim (collectively, "Damages"), directly or indirectly arising or resulting from or in connection with: (a) any breach of any representation or warranty made by the Company, the Stockholders of the Company set forth on the signature pages of this Agreement or the Stockholder Representative (on behalf of the stockholders of the Company) in this Agreement or in any certificate delivered by the Company pursuant to this Agreement; (b) any breach by the Company of any covenant or obligation of the Company in this Agreement; or (c) any breach of, or failure to assign to Parent or any Affiliate of Parent all of the rights under and terms of, any Contract to which the Company is a party directly or indirectly arising or resulting from or in connection with the Company's ceasing to exist by virtue of Merger. 10.3. Indemnification and Payment of Damages by Parent. Parent shall indemnify and hold harmless the holders of Shares, and shall pay to such holders the amount of any Damages arising, directly or indirectly, from or in connection with: (a) any breach of any representation or warranty made by Parent in this Agreement or in any certificate delivered by Parent pursuant to this Agreement; or (b) any breach by Parent of any covenant or obligation of Parent in this Agreement. 10.4. Limitations on Amount -- Holder of Shares. Holders of Shares shall not have liability for indemnification with respect to any matter described in clause (a), (b) or (c) of Section 10.2 (i) unless and until the total amount of all Damages with respect to such matters, taken together, exceeds $500,000, in which case the applicable Parent Indemnified Party shall be entitled to indemnification for the entire amount of the Parent Indemnified Party's Damages and (ii) for any Damages in the aggregate in excess of the Holdback; provided, however, that this Section 10.4 shall not apply to any breach of the Company's representations and warranties of which the Company had knowledge at any time prior to the date on which such representation and warranty is made or any intentional breach by the Company of any covenant or obligation, and the holders of Shares shall be liable for all Damages with respect to such breaches. 10.5. Limitations on Amount -- Parent. Parent shall have no liability (for indemnification or otherwise) with respect to the matters described in clause (a) or (b) of Section 10.3 (i) unless and until the total of all Damages with respect to such matters, taken together, exceeds $500,000, in which case the holders of Shares shall be entitled to indemnification for the entire amount of their Damages and (ii) for any Damages in the aggregate in excess of an amount equal to (x) 535,000 multiplied by (y) the closing price on the NASDAQ of the Parent Stock on the Closing Date; provided, however, that this Section 10.5 shall not apply to any breach of the Parent's representations and warranties of which the Parent had knowledge at any time prior to the date on which such A-38 145 representation and warranty is made or any intentional breach by Parent of any covenant or obligation, and Parent shall be liable for all Damages with respect to such breaches. 10.6. Payments to Parent. (a) Any payment to be made to a Parent Indemnified Party pursuant to this Article, shall be made in shares of Parent Common Stock valued at the Closing price on the NASDAQ of the Parent Stock on the Closing Date in accordance with the terms of the Escrow Agreement. (b) All shares of Parent Common Stock held in the Holdback Account (the "Held Back Shares") shall, for federal income tax purposes, be deemed to be owned by the stockholders of the Company, or such other persons or entities in whose names the stockholders may instruct Parent to record on the stock transfer books of the Company the Held Back Shares, who or which shall be entitled to vote the Held Back Shares on all matters presented to the stockholders of Parent. Except with respect to any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares in the event any dividends or distributions are made on or in respect of the Held Back Shares, such dividends or distributions received with respect to such Held Back Shares from the Effective Time through the time of such payment shall be paid to the stockholders of the Company in accordance with the terms of the Escrow Agreement. 10.7. Procedures for Indemnification. The party seeking indemnification pursuant to this Article (the "Indemnified Party") agrees to give prompt notice to the parties providing indemnification pursuant to this Article (the "Indemnifying Parties") of the assertion of any claim, or the commencement of any suit, action or proceeding in respect of which indemnity may be sought under this Article; provided that the failure to give such notice shall not affect the rights of the Indemnifying Party except to the extent the Indemnified Party is materially prejudiced by such failure. The notice shall state the information then available regarding the amount and nature of such claim, liability or expense and shall specify the provision or provisions of this Agreement under which the liability or obligation is asserted. The Indemnifying Party may at the request of the Indemnified Party participate in and control the defense of any such suit, action or proceeding at its own expense. If the Indemnifying Party admits responsibility for indemnification with respect to such claim, the Indemnifying Party shall be entitled to control the defense of any such suit, action or proceeding at its own expense. The Indemnified Party shall cooperate with the Indemnifying Party in such defense; provided that the Indemnified Party shall not be obligated to incur any out-of-pocket expenses except to the extent the Indemnifying Party agrees in writing to reimburse the Indemnified Party for such expenses as they are incurred. The Indemnifying Party shall not be liable for any settlement effected without its consent of any claim, litigation or proceeding in respect of which indemnification may be sought hereunder; provided that such consent shall not be unreasonably withheld (it being understood that the Indemnifying Party may withhold consent if such settlement does not release the Indemnifying Party from liability (in its capacity as Indemnifying Party) in connection with such claim, litigation or proceeding). Without the consent of the Indemnified Party, which consent shall not be unreasonably withheld, the Indemnifying Party shall not settle any claim, litigation or proceeding in respect of which indemnity may be sought hereunder if such settlement involves an admission of liability or wrongdoing on the part of the Indemnified Party, or a restriction on the operation of the Indemnified Party's business in the future or would materially adversely affect the business reputation or Tax liability of the Indemnified Party. 10.8. Non-Exclusive Remedy. (a) Notwithstanding anything herein to the contrary, the parties hereto acknowledge and agree that the provisions of this Article X with respect to indemnification shall not be the exclusive remedy for Parent and that Parent shall have the right to recover Damages from the holders of Shares from any court of competent jurisdiction for, and that the holders of Shares shall be jointly and severally liable for, Damages directly or indirectly arising or resulting from or in connection with: (i) any breach of any representation or warranty made by the Company, the A-39 146 Stockholders Representative (on behalf of the stockholders of the Company) or the stockholders of the Company set forth on the signature pages of this Agreement or in any certificate delivered by the Company pursuant to this Agreement; (ii) any breach by the Company of any covenant or obligation of the Company in this Agreement or (iii) any breach of, or failure to assign to Parent or any Affiliate of Parent of all of the terms of, any Contract to which the Company is a party directly or indirectly arising or resulting from or in connection with the Company's ceasing to exist by virtue of the Merger; provided, however, the holders of Shares shall not have any liability for any Damages in the aggregate in excess of the amount equal to (x) 535,000 multiplied by (y) the closing price on the NASDAQ of the Parent Stock on the Closing Date. (b) Any payment of a Damage claim pursuant to Section 10.8 may, at the option of the holder of Shares, be made in cash or in shares of Parent Common Stock having a value equal to the amount of cash that would satisfy in full such Damage claim. 10.9. Tax Treatment. Indemnification payments made pursuant to this Article shall be treated for Tax purposes as adjustments to the Merger Consideration. 10.10. Pooling. It is understood and agreed that no party to this Agreement shall take any action or omit to take any action pursuant to this Article to the extent that such action or omission would result in the Merger not qualifying for pooling-of-interests accounting treatment under GAAP. ARTICLE XI MISCELLANEOUS AND GENERAL 11.1. Modification or Amendment. Subject to the provisions of the applicable law, at any time prior to the Effective Time, the parties hereto may modify or amend this Agreement, by written agreement executed and delivered by duly authorized officers of the respective parties. 11.2. Waiver of Conditions. At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of any other party hereto or (b) waive compliance with any of the agreements of any other party or any conditions to its own obligations, in each case only to the extent such obligations, agreements and conditions are intended for its benefit and to the extent permitted by applicable law. Any such extension or waiver shall be binding upon a party only if such extension or waiver is set forth in a writing executed by such party. 11.3. Counterparts. This Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. 11.4. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. (a) THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF DELAWARE WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. THE PARTIES HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF DELAWARE AND THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA LOCATED IN THE STATE OF DELAWARE SOLELY IN RESPECT OF THE INTERPRETATION AND ENFORCEMENT OF THE PROVISIONS OF THE TRANSACTION AGREEMENTS, AND IN RESPECT OF THE TRANSACTIONS CONTEMPLATED THEREBY, AND HEREBY WAIVE, AND AGREE NOT TO ASSERT, AS A DEFENSE IN ANY ACTION, SUIT OR PROCEEDING FOR THE INTERPRETATION OR ENFORCEMENT HEREOF OR OF ANY SUCH DOCUMENT, THAT IT IS NOT SUBJECT THERETO OR THAT SUCH ACTION, SUIT OR A-40 147 PROCEEDING MAY NOT BE BROUGHT OR IS NOT MAINTAINABLE IN SAID COURTS OR THAT THE VENUE THEREOF MAY NOT BE APPROPRIATE OR THAT ANY OF THE TRANSACTION AGREEMENTS MAY NOT BE ENFORCED IN OR BY SUCH COURTS, AND THE PARTIES HERETO IRREVOCABLY AGREE THAT ALL CLAIMS WITH RESPECT TO SUCH ACTION OR PROCEEDING SHALL BE HEARD AND DETERMINED IN SUCH A DELAWARE STATE OR FEDERAL COURT. THE PARTIES HEREBY CONSENT TO AND GRANT ANY SUCH COURT JURISDICTION OVER THE PERSON OF SUCH PARTIES AND OVER THE SUBJECT MATTER OF SUCH DISPUTE AND AGREE THAT MAILING OF PROCESS OR OTHER PAPERS IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING IN THE MANNER PROVIDED IN SECTION 11.5 OR IN SUCH OTHER MANNER AS MAY BE PERMITTED BY LAW SHALL BE VALID AND SUFFICIENT SERVICE THEREOF. (b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THE TRANSACTION AGREEMENTS IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO ANY OF THE TRANSACTION AGREEMENTS, OR THE TRANSACTIONS CONTEMPLATED THEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 11.4. 11.5. Notices. Any notice, request, instruction or other document to be given hereunder by any party to the others shall be in writing and delivered personally or sent by express mail or equivalent over-night courier service, prepaid, or by facsimile: if to Parent or Merger Sub Affymetrix, Inc. 3380 Central Expressway Santa Clara, CA 95051 Attention: General Counsel (Vern Norviel) fax: (408) 481-4709 (with a copy to Neil Anderson, Esq. Sullivan & Cromwell 125 Broad Street, New York, NY 10004 fax: (212) 558-3588). if to the Company Genetic MicroSystems, Inc. 34 Commerce Way Woburn, MA 01801 Attention: Jean Montagu fax: (781) 932-9433 A-41 148 (with a copy to Michael Lytton, Esq. Palmer & Dodge, LLP One Beacon Street Boston, MA 02108 fax: (617) 227-4420) or to such other persons or addresses as may be designated in writing by the party to receive such notice as provided above. 11.6. Entire Agreement. This Agreement (including any exhibits hereto), the Company Disclosure Schedule, the Parent Disclosure Schedule, the Stock Option Agreement and the Escrow Agreement constitute the entire agreement, and supersede all other prior agreements, understandings, representations and warranties both written and oral, among the parties, with respect to the subject matter hereof. 11.7. No Third Party Beneficiaries. This Agreement is not intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. 11.8. Obligations of Parent. Whenever this Agreement requires Merger Sub to take any action, such requirement shall be deemed to include an undertaking on the part of Parent to cause Merger Sub to take such action. 11.9. Transfer Taxes. All transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including penalties and interest) incurred by Parent or the Company in connection with the Merger shall be paid 50% by Parent and 50% by the Company when due. 11.10. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability or the other provisions hereof. If any provision of this Agreement, or the application thereof to any Person or any circumstance, is invalid or unenforceable, (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (b) the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction. 11.11. Interpretation. (a) The table of contents and headings herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. Where a reference in this Agreement is made to a Section or Exhibit, such reference shall be to a Section of or Exhibit to this Agreement unless otherwise indicated. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." (b) The inclusion of any matter in a Section or Schedule to the Company Disclosure Schedule shall also be deemed to be an inclusion for any other Section or Schedule in the Company Disclosure Schedule if there is a sufficient indication in the Section or Schedule containing the inclusion to reasonably inform a Person of the applicability of the matter to such other Schedule. In the event of any conflict between the Parent Disclosure Schedule or the Company Disclosure Schedule and this Agreement, the terms of this Agreement shall prevail. 11.12. Assignment. This Agreement shall not be assignable by operation of law or otherwise; provided, however, (i) Parent may assign this Agreement to any entity that acquires substantially all of the business or assets of Parent and (ii) that Parent may designate, by written notice to the Company, another wholly-owned direct or indirect Subsidiary to be a Constituent Corporation in lieu of Merger Sub, in which event all references herein to Merger Sub shall be deemed references to A-42 149 such other Subsidiary, except that all representations and warranties made herein with respect to Merger Sub as of the date of this Agreement shall be deemed representations and warranties made with respect to such other Subsidiary as of the date of such designation. 11.13. Specific Performance. The parties hereto acknowledge that, in view of the uniqueness of the subject matter hereof, the parties hereto would not have an adequate remedy at law for money damages if this Agreement were not performed in accordance with its terms, and therefore agree that the parties hereto shall be entitled to specific enforcement of the terms hereof in addition to any other remedy to which the parties hereto may be entitled at law or in equity. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the parties hereto as of the date first written above. AFFYMETRIX, INC. By: /s/ VERN NORVIEL ------------------------------------ Name: Vern Norviel Title: Vice President, General Counsel and Corporate Secretary GMS ACQUISITION, INC. By: /s/ SUSAN E. SIEGEL ------------------------------------ Name: Susan E. Siegel Title: President By: /s/ EDWARD HURWITZ ------------------------------------ Name: Edward Hurwitz Title: Treasurer GENETIC MICROSYSTEMS, INC. By: /s/ JEAN MONTAGU ------------------------------------ Name: Jean Montegu Title: President By: /s/ PETER LEWIS ------------------------------------ Name: Peter Lewis Title: Treasurer A-43 150 Stockholder Representative (on behalf of all of the stockholders of Genetic MicroSystems, Inc.) By: /s/ JEAN MONTAGU ------------------------------------ Name: Jean Montagu /s/ STANLEY ROSE ------------------------------------ Stanley Rose /s/ PETER HONKANEN ------------------------------------ Peter Honkanen /s/ MYLES L. MACE, JR. ------------------------------------ Myles L. Mace, Jr. /s/ DOMINIC MONTAGU ------------------------------------ Dominic Montagu /s/ SASHA MONTAGU ------------------------------------ Sasha Montagu A-44 151 APPENDIX B STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT, dated as of September 10, 1999 (the "Agreement"), between Affymetrix, Inc., a Delaware corporation (the "Grantee"), and Genetic MicroSystems, Inc., a Massachusetts corporation (the "Grantor"). WHEREAS, the Grantee, GMS Acquisition, Inc., a Massachusetts corporation and a wholly owned subsidiary of the Grantee ("Merger Sub"), the Grantor and Jean Montagu as Stockholder Representative are entering into an Agreement and Plan of Merger, dated as of the date hereof (the "Merger Agreement"), which provides, among other things, for the merger of Merger Sub with and into Grantor (the "Merger"); WHEREAS, the Grantee and Merger Sub have requested that the Grantor grant to the Grantee an option to purchase up to 684,297 shares of Common Stock, no par value per share, of the Grantor (the "Common Stock"), on the terms and subject to the conditions hereof; and WHEREAS, the Grantor is willing to grant the Grantee the requested option. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein, the parties hereto agree as follows: 1. The Option; Exercise; Adjustments; Payment of Spread; Repurchase Right. (a) Contemporaneously herewith the Grantee, Merger Sub and the Grantor are entering into the Merger Agreement. Subject to the other terms and conditions set forth herein, the Grantor hereby grants to the Grantee an irrevocable option (the "Option") to purchase up to 684,297 shares of Common Stock (the "Shares") at a cash purchase price equal to $21.50 per share (the "Purchase Price"). The Option may be exercised by the Grantee, in whole or in part, at any time, or from time to time, following (but not prior to) the occurrence of the events set forth in any of clauses (i), (ii), (iii) or (iv) of Section 2(d) hereof, and prior to the Termination Date (as defined herein). (b) In the event the Grantee wishes to exercise the Option, the Grantee shall send a written notice to the Grantor (the "Stock Exercise Notice") specifying the total number of Shares it wishes to purchase and a date (subject to the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act")) not later than 10 business days and not earlier than three business days following the date such notice is given for the closing of such purchase. In the event of any change in the number of issued and outstanding shares of capital stock of the Company (by reason of any stock dividend, stock split, split-up, recapitalization, merger, issuance of capital stock upon exercise of warrants or options or any other event), the number of Shares subject to this Option and the purchase price per Share shall be appropriately adjusted to restore the Grantee to its rights hereunder. (c) If at any time the Option is then exercisable pursuant to the terms of Section 1(a) hereof and at or prior to such time the termination fee referred to in Section 9.5(b) of the Merger Agreement shall have become payable, the Grantee may from time to time elect, in lieu of exercising the Option to purchase Shares provided in Section 1(a) hereof, to send a written notice to the Grantor (a "Cash Exercise Notice") specifying a date not later than 20 business days and not earlier than 10 business days following the date such notice is given on which date the Grantor shall pay to the Grantee an amount in cash (the "Cancellation Amount") equal to the Spread (as hereinafter defined) multiplied by all or such portion of the Shares subject to the Option as Grantee shall specify. As used herein "Spread" shall mean the excess over the Purchase Price of the highest price per share of Common Stock (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid or proposed to be paid by any person pursuant to any Acquisition Proposal (as B-1 152 defined in the Merger Agreement) occurring after the date of this Agreement and prior to the Termination Date (the "Alternative Purchase Price"). If the Alternative Purchase Price includes any property other than cash, the Alternative Purchase Price shall be the sum of (i) the fixed cash amount, if any, included in the Alternative Purchase Price plus (ii) the fair market value of such other property. If such other property consists of securities with an existing public trading market, the average of the closing prices (or the average of the closing bid and asked prices if closing prices are unavailable) for such securities in their principal public trading market on the five trading days ending five days prior to the date of the Cash Exercise Notice shall be deemed to equal the fair market value of such property. Upon exercise of its right to receive cash pursuant to this Section 1(c), the obligations of the Grantor to deliver Shares pursuant to Section 3 shall be terminated with respect to such number of Shares for which the Grantee shall have elected to be paid the Spread. (d) At the request of the Grantor at any time during the 180-day period commencing on each date on which the Option is exercised (the "Call Period"), the Grantor may repurchase from the Grantee, and the Grantee shall sell to the Grantor, any or all of the Shares acquired by the Grantee pursuant hereto as a result of such exercise and with respect to which the Grantee has beneficial ownership at the time of such repurchase at a price per share equal to the Repurchase Price (defined below) per share in respect of the Shares so acquired (such price per share multiplied by the number of Shares to be repurchased pursuant to this Section 1(d) being herein called the "Repurchase Consideration"). Each date on which the Grantor exercises its rights under this Section 1(d) by delivering its request to the Grantee is referred to as a "Grantor Request Date." "Repurchase Price" per share shall be the Purchase Price. If the Grantor exercises its rights under this Section 1(d), the Grantor shall, within five business days after the applicable Grantor Request Date, pay the applicable Repurchase Consideration in immediately available funds, and the Grantee shall surrender to the Grantor certificates evidencing the Shares purchased hereunder, and the Grantee shall warrant to the Grantor that, immediately prior to the repurchase thereof pursuant to this Section 1(d), the Grantee had sole record and beneficial ownership of such Shares and that such Shares were then held free and clear of all encumbrances. 2. Conditions to Delivery of Shares. The Grantor's obligation to deliver Shares upon exercise of the Option is subject only to the conditions that: (a) No preliminary or permanent injunction or other order issued by any federal or state court of competent jurisdiction prohibiting the delivery of the Shares shall be in effect; and (b) Any applicable waiting periods under the HSR Act shall have expired or been terminated; and (c) the representations and warranties of the Grantee made in Section 5 of this Agreement shall be true and correct in all material respects as of the date of the closing of the issuance of the Shares; and (d) (i) in the event that (A) a bona fide Acquisition Proposal (as defined in the Merger Agreement) shall have been made to the Grantor or any of its stockholders, and on or following the date of the Merger Agreement, but prior to the date of the meeting of the Grantor's stockholders to approve the Merger Agreement, such Acquisition Proposal is or becomes publicly known, and (B) on or following the date on which such Acquisition Proposal is or becomes publicly known, (i) the Merger Agreement is terminated by the Grantor pursuant to Section 9.3(a) of the Merger Agreement or (ii) the Merger Agreement is terminated by the Grantee pursuant to clause (i) (in connection with a Superior Proposal) or clause (iii) of Section 9.4 of the Merger Agreement; or (iii) the Grantor shall have delivered to Grantee the written notification pursuant to Section 9.3(a)(ii) of the Merger Agreement and the Grantee B-2 153 shall have notified the Grantor in writing that the Grantee does not intend to match the Superior Proposal (as defined in the Merger Agreement) referred to in such notification. As used in this Agreement, "person" shall have the meaning specified in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended. 3. The Closing. (a) Any closing hereunder shall take place on the date specified by the Grantee in its Stock Exercise Notice or Cash Exercise Notice or as specified in Section 1(d), as the case may be, at 10:00 A.M., local time, at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New York, or, if the conditions set forth in Section 2(a), (b) or (c) have not then been satisfied, on the second business day following the satisfaction of such conditions, or at such other time and place as the parties hereto may agree (the "Closing Date"). On the Closing Date, (i) in the event of a closing pursuant to Section 1(b) hereof, the Grantor will deliver to the Grantee a certificate or certificates, representing the Shares in the denominations designated by the Grantee in its Stock Exercise Notice and the Grantee will purchase such Shares from the Grantor at the price per Share equal to the Purchase Price, (ii) in the event of a closing pursuant to Section 1(c) hereof, the Grantor will deliver to the Grantee cash in an amount determined pursuant to Section 1(c) hereof; or (iii) in the event of a closing pursuant to Section 1(d) hereof, the Grantor will deliver to the Grantee cash in an amount determined pursuant to Section 1(d) hereof. Any payment made by the Grantee to the Grantor, or by the Grantor to the Grantee, pursuant to this Agreement shall be made by certified or official bank check or by wire transfer of federal funds to a bank designated by the party receiving such funds. (b) The Grantee agrees not to transfer or otherwise dispose of the Option or the Shares, or any interest therein, except in compliance with the Securities Act of 1933, as amended (the "Securities Act") and any applicable state securities law. The Grantee further agrees that the certificates representing the Shares shall bear an appropriate legend relating to the fact that such Shares have not been registered under the Securities Act. 4. Representations and Warranties of the Grantor. The Grantor represents and warrants to the Grantee that (a) the Grantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Massachusetts and has the requisite corporate power and authority to enter into and perform this Agreement; (b) the execution and delivery of this Agreement by the Grantor and the consummation by it of the transactions contemplated hereby have been duly authorized by the Board of Directors of the Grantor and this Agreement has been duly executed and delivered by a duly authorized officer of the Grantor and constitutes a valid and binding obligation of the Grantor, enforceable in accordance with its terms; (c) the Grantor has taken all necessary corporate action to authorize and reserve the Shares issuable upon exercise of the Option and the Shares, when issued and delivered by the Grantor upon exercise of the Option and paid for by the Grantee as contemplated hereby, will be duly authorized, validly issued, fully paid and non-assessable and free of preemptive rights; (d) except as otherwise required by the HSR Act, the execution and delivery of this Agreement by the Grantor and the consummation by it of the transactions contemplated hereby do not require the consent, waiver, approval or authorization of or any filing with any person or public authority and will not violate, result in a breach of or the acceleration of any obligation under, or constitute a default under, any provision of the Grantor's Organizational Documents (as defined in the Merger Agreement), or any indenture, mortgage, lien, lease, agreement, contract, instrument, order, rule, regulation, judgment, ordinance, or decree, or restriction by which the Grantor or any of its subsidiaries or any of their respective properties or assets is bound; and (e) no "fair price", "moratorium", "control share acquisition," "interested shareholder" or other form of antitakeover statute or regulation (including but not limited to Chapters 110C, 110D, 110E B-3 154 and 110F of the General Laws of the Commonwealth of Massachusetts) is or shall be applicable to the acquisition of Shares pursuant to this Agreement. 5. Representations and Warranties of the Grantee. The Grantee represents and warrants to the Grantor that (a) the Grantee is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to enter into and perform this Agreement, (b) the execution and delivery of this Agreement by the Grantee and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Grantee and this Agreement has been duly executed and delivered by a duly authorized officer of the Grantee and constitutes a valid and binding obligation of the Grantee, enforceable in accordance with its terms; and (c) the Grantee is acquiring the Option and, if and when it exercises the Option, will be acquiring the Shares issuable upon the exercise thereof for its own account and not with a view to distribution or resale in any manner which would be in violation of the Securities Act. 6. Filings; Governmental Consents. After the Option becomes exercisable hereunder, the Grantor will use its reasonable best efforts to obtain approval of such listing and to effect all necessary filings by the Grantor under the HSR Act. Each of the parties hereto will use its reasonable best efforts to obtain consents of all third parties and governmental authorities, if any, necessary to the consummation of the transactions contemplated by this Agreement. 7. Expenses. Each party hereto shall pay its own expenses incurred in connection with this Agreement, except as otherwise specifically provided herein. 8. Modification or Amendment. Subject to the provisions of applicable law, the parties hereto may modify or amend this Agreement, by written agreement executed and delivered by duly authorized officers of the respective parties. 9. Counterparts. This Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. 10. GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. (A) THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. The parties hereby irrevocably submit to the jurisdiction of the courts of the State of Delaware and the Federal courts of the United States of America located in Delaware solely in respect of the interpretation and enforcement of the provisions of this Agreement, the Merger Agreement and of the other documents referred to in this Agreement and the Merger Agreement, and in respect of the transactions contemplated hereby and thereby, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or of any such document, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement, the Merger Agreement, or any such document may not be enforced in or by such courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such a Delaware State or Federal court. The parties hereby consent to and grant any such court jurisdiction over the person of such parties and over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 11 or in such other manner as may be permitted by law, shall be valid and sufficient service thereof. B-4 155 (B) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (II) EACH SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (III) EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (IV) EACH SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10. 11. Notices. Any notice, request, instruction or other document to be given hereunder by any party to the others shall be in writing and delivered personally or sent by registered or certified mail, postage prepaid, or by facsimile: if to the Grantee: General Counsel: Vern Norviel Affymetrix, Inc. 3380 Central Expressway Santa Clara, CA 95051 fax: (408) 481-4709 with copies to: Neil T. Anderson Sullivan & Cromwell 125 Broad Street New York, NY 10004 fax: (212) 558-3588 if to the Grantor: Jean Montagu Genetic MicroSystems, Inc. 34 Commerce Way Woburn, MA 01801 fax: (781) 932-9433 with copies to: Michael E. Lytton Palmer & Dodge LLP One Beacon Street Boston, MA 02108 fax: (617) 227-4420 or to such other persons or addresses as may be designated in writing by the party to receive such notice as provided above. B-5 156 12. Entire Agreement. This Agreement (including any exhibits and schedules hereto), the Merger Agreement and the other documents referred to in this Agreement and the Merger Agreement, constitute the entire agreement, and supersede all other prior agreements, understandings, representations and warranties both written and oral, among the parties, with respect to the subject matter hereof. 13. No Third Party Beneficiaries. This Agreement is not intended to confer upon any person or entity other than the parties hereto any rights or remedies hereunder. 14. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any person or entity or any circumstance, is invalid or unenforceable, (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (b) the remainder of this Agreement and the application of such provision to other persons or entities or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction. 15. Specific Performance. The parties hereto each acknowledge that, in view of the uniqueness of the subject matter hereof, the parties hereto would not have an adequate remedy at law for money damages if this Agreement were not performed in accordance with its terms, and therefore agree that the parties hereto shall be entitled to specific enforcement of the terms hereof in addition to any other remedy to which the parties hereto may be entitled at law or in equity. 16. Assignment. This Agreement shall not be assignable by operation of law or otherwise; provided, however, that (i) the Grantee may assign this Agreement to any entity that acquires substantially all of the business or assets of the Grantee and (ii) the Grantee may assign its rights and obligations under this Agreement to any of its direct or indirect wholly owned subsidiaries (including Merger Sub). Any purported assignment made in contravention of this Agreement shall be null and void. 17. Captions. The Section captions herein are for convenience of reference only and do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. 18. Termination. (a) The right to exercise the Option granted pursuant to this Agreement shall terminate at (and the Option shall no longer be exercisable after) the earliest of (i) the Effective Time (as defined in the Merger Agreement), (ii) the first anniversary of the earliest to occur of the events set forth in any of clauses (i), (ii), (iii) or (iv) of Section 2(d), and (iii) the thirtieth day following the termination of the Merger Agreement if prior to such thirtieth day the events set forth in any of clauses (i), (ii), (iii) or (iv) of Section 2(d) shall not have occurred (such earliest date being referred to in this Agreement as the "Termination Date"); provided that, if the Option cannot be exercised or the Shares cannot be delivered to the Grantee upon such exercise because one or more of the conditions set forth in Section 2(a) or (b) hereof have not yet been satisfied, the Termination Date shall be extended until thirty days after such impediment to exercise or delivery has been removed. (b) All representations and warranties contained in this Agreement shall survive delivery of and payment for the Shares. B-6 157 19. Profit Limitation. (a) Notwithstanding any other provision of this Agreement or the Merger Agreement, in no event shall the Grantee's Total Profit (as hereinafter defined) exceed $5,000,000 and, if it otherwise would exceed such amount, the Grantee shall repay such excess amount to Grantor in cash so that Grantee's Total Profit shall not exceed $5,000,000 after taking into account the foregoing actions. (b) As used herein, the term "Total Profit" shall mean the aggregate amount (before taxes) of (i) the amount of cash actually received by Grantee pursuant to Section 9.5 of the Merger Agreement and Section 1(c) hereof, less (ii) any repayment of a portion of such cash to Grantor. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by duly authorized officers of the parties hereto as of the date hereof. GENETIC MICROSYSTEMS, INC. By: /s/ JEAN MONTAGU ------------------------------------ Name: Jean Montagu Title: President AFFYMETRIX, INC. By: /s/ VERN NORVIEL ------------------------------------ Name: Vern Norviel Title: Vice President, General Counsel, and Corporate Secretary B-7 158 APPENDIX C ESCROW AGREEMENT ESCROW AGREEMENT (hereinafter called this "Agreement"), dated as of September 10, 1999, among Genetic MicroSystems, Inc., a Massachusetts corporation (the "Company"), Affymetrix, Inc., a Delaware corporation ("Parent"), GMS Acquisition, Inc., a Massachusetts corporation and a wholly-owned subsidiary of Parent ("Merger Sub"), Jean Montagu (the "Stockholder Representative") and Bank One Trust Company, NA, as the Escrow Agent (the "Escrow Agent"). WHEREAS, Parent, Merger Sub, the Company, the Stockholder Representative and certain stockholders of the Company have entered into an Agreement and Plan of Merger dated as of September 10, 1999 (the "Merger Agreement") pursuant to which, among other things, the Company shall merge with and into Merger Sub (the "Merger"); WHEREAS, pursuant to the terms of the Merger Agreement, Parent Indemnified Parties (as defined below) are to be indemnified by the Company's stockholders for certain events or occurrences specified in Article X of the Merger Agreement, including breaches of representations, warranties, covenants and agreements made, entered into or to be performed pursuant to the terms of the Merger Agreement; NOW THEREFORE, in consideration of mutual promises and good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows: 1. Definitions. The following terms, as used herein, have the following meaning: "business day" means any day other than a Saturday, a Sunday or a day on which banks in California are authorized or obligated by law or executive order to close. "Closing Date" means the date on which the Merger becomes effective. "Escrow Account" means a separate account established by the Escrow Agent for the purpose of holding shares of Parent Stock delivered to it pursuant to Section 3 (collectively, the "Assets"). "Officer's Certificate" means a certificate signed by the President or any Vice-President of Parent substantially in the form attached hereto as Exhibit A stating that a Parent Indemnified Party has incurred or suffered any damages, losses, liabilities and expenses (including reasonable attorney fees and expenses) as a result of certain events or occurrences specified in Article X of the Merger Agreement, including a breach of any representation, warranty, covenant or agreement set forth in the Merger Agreement, for which indemnification is available pursuant to the Merger Agreement in the aggregate amount set forth in such Officer's Certificate (the "Indemnity Amount") that is delivered by Parent on the same day to the Escrow Agent and the Stockholder Representative. "Parent Indemnified Party" means Parent and any of its affiliates, including, effective upon the closing of the Merger, the Surviving Corporation. "Parent Stock" means the common stock, par value $0.01 per share, of Parent. "Person" means an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Subsidiary" means, with respect to any Person, any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or C-1 159 other persons performing similar functions are at any time directly or indirectly owned by such Person. 2. Appointment of the Escrow Agent. Parent, Merger Sub, the Company and the Stockholder Representative hereby appoint Bank One Trust Company, NA to act as the Escrow Agent on the terms and conditions set forth herein and Bank One Trust Company, NA hereby accepts such appointment on such terms and conditions. 3. Deposit of Shares. In accordance with the Merger Agreement, Parent shall deposit with the Escrow Agent at the closing of the Merger 107,000 shares of Parent Stock. 4. Escrow Account. The Escrow Agent shall deposit such shares, upon receipt, into the Escrow Account and shall hold, safeguard and distribute such shares in accordance with and subject to the terms of this Agreement. The shares of Parent Stock held in the Escrow Account (i) shall not, so long as the Escrow Account is in existence, be sold by the Stockholder Representative, any record holder thereof or the Escrow Agent and (ii) shall be recorded on the stock transfer books of Parent as being held in the name of the stockholder(s) who own such shares of record and the Stockholder Representative shall execute any assignment on behalf of such holders that is reasonably requested by the Escrow Agent to permit the Escrow Agent to perform its duties hereunder. The Escrow Agent shall exercise the voting rights associated with shares of Parent Stock remaining in the Escrow Account in accordance with such instructions as the Stockholder Representative may from time to time deliver to the Escrow Agent. 5. Purpose. It is understood and agreed that the Escrow Account and the Assets are for the purpose of satisfying the indemnification obligations owed to Parent by the Stockholder Representative and the other stockholders of the Company and no Assets shall be used for any other purpose except as explicitly set forth in this Agreement. 6. Distributions on Parent Stock. Parent shall pay to the Escrow Agent all cash or stock dividends and other distributions (including by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares) with respect to shares of Parent Stock held in the Escrow Account. The Escrow Agent shall (i) deposit dividends and distributions declared by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares of Parent Stock into the Escrow Account in accordance with and subject to the terms of this Agreement and such dividends and distributions will be held and distributed in accordance with the terms of this Agreement and (ii) distribute cash or stock dividends and distributions not declared by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares of Parent Stock to the Stockholder Representative for distribution to the stockholders of the Company in accordance with the relative ownership percentage of each such stockholder. 7. Rights to the Escrow Account. In accordance with and subject to the terms of this Agreement, Parent Indemnified Parties shall be entitled to recover from the Escrow Account the Indemnity Amount or the Final Indemnity Amount (as defined below), as the case may be. 8. Indemnity Payments by the Escrow Agent. (a) Subject to Section 8(b), on the fifteenth business day after receipt by the Escrow Agent of an Officer's Certificate, the Escrow Agent shall deliver to Parent from the Assets in a manner specified in writing by Parent the number of shares of Parent Stock equal to the quotient obtained by dividing the Indemnity Amount by the closing price on the NASDAQ stock market of the Parent Stock on the Closing Date. (b) If the Stockholder Representative shall, within fifteen business days after the Escrow Agent's and the Stockholder Representative's receipt of the Officer's Certificate, notify the Escrow Agent and Parent in writing that the Stockholder Representative objects to the Indemnity Amount, (i) the Indemnity Amount shall not be delivered to Parent, (ii) Parent and the Stockholder C-2 160 Representative shall (A) endeavor in good faith to agree on the amount the Parent Indemnified Party shall be entitled to recover from the Escrow Account or have such amount determined by a court of competent jurisdiction pursuant to the Merger Agreement (such amount being the "Final Indemnity Amount") and (B) either deliver to the Escrow Agent a certificate signed by the President or any Vice-President of Parent and the Stockholder Representative setting forth the Final Indemnity Amount (the "Joint Certificate") or deliver to the Escrow Agent the court order or judgment by a court of competent jurisdiction, certified by either the Stockholder Representative or Parent as an original (or as a true and complete copy thereof) (a "Final Judgment") and (iii) the Escrow Agent shall deliver to Parent the Final Indemnity Amount from the Assets in the manner set forth in Section 8(a). If the Stockholder Representative fails so to notify Parent or the Escrow Agent of the Stockholder Representative's objection to the Indemnity Amount within such ten business day period, the Indemnity Amount shall be deemed conclusive and binding on all the parties hereto, whereupon the Escrow Agent shall make distributions from the Escrow Account in the manner set forth in Section 8(a). (c) Notwithstanding any of the foregoing, the Escrow Account and any payments hereunder shall be subject to equitable adjustment to reflect through proportionate increase or decrease any change in the outstanding capital stock of Parent for any reason, including, without limitation, by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of shares of Parent Stock, or any stock dividend thereon. Parent hereby undertakes to notify the Escrow Agent promptly of any event requiring such equitable adjustment. 9. The Stockholder Representative. (a) Pursuant to the terms of the Merger Agreement each stockholder of the Company, who has not perfected statutory dissenters' rights, has granted the Stockholder Representative the authority to act as agent for each such stockholder in connection with the transactions contemplated hereunder and to perform all acts required hereby, including, but not limited to, receiving and delivering all notices, giving all approvals and waivers, and exercising all other rights of each such stockholder hereunder. (b) In the event of the death or incapacity of the Stockholder Representative, such other Person as may be designated by the vote or written consent of a majority in interest of the stockholders of the Company (as set forth on Exhibit C hereto) shall, upon notice to Parent and the Escrow Agent, be appointed as the successor Stockholder Representative. (c) Parent and the Escrow Agent shall be entitled to rely, without any investigation or inquiry by Parent or the Escrow Agent, upon all actions by the Stockholder Representative as having been taken upon the authority of the stockholders of the Company. Any action by the Stockholder Representative shall be conclusively deemed to be the action of the stockholders of the Company and Parent and the Escrow Agent shall not have any liability or responsibility to the stockholders of the Company for any action taken in reliance thereon. (d) The Stockholder Representative shall not be liable to the stockholders of the Company for any action taken or omitted to be taken hereunder as Stockholder Representative, except due to the Stockholder Representative's gross negligence or bad faith. The Stockholders of Genetic MicroSystems shall indemnify the Stockholder Representative and hold the Stockholder Representative harmless against any loss, liability or expense incurred without gross negligence or bad faith on the part of the Stockholder Representative and arising out of or in connection with the acceptance or administration of the Stockholder Representative's duties hereunder, including the reasonable fees and expenses of any legal counsel retained by the Stockholder Representative. 10. Termination of the Escrow Account. (a) Five business days after the one-year anniversary of the Effective Time (the "Termination Date"), the Escrow Agent shall distribute all Assets then remaining including any dividends and distributions not yet distributed pursuant to Section 6 hereof C-3 161 (except a sufficient amount of Assets to satisfy any unsatisfied claim specified in any Officer's Certificate, Joint Certificate or Final Judgment theretofore delivered to the Escrow Agent) to the stockholders of the Company pro rata in accordance with the relative ownership percentage of each such stockholder; provided, however, that if the Escrow Agent shall receive a certificate signed by the President or any Vice-President of Parent instructing the Escrow Agent not to distribute such Assets until any unsatisfied indemnification claim hereunder has been resolved, the Escrow Agent shall hold such Assets until such time as it receives a certificate signed by the President or any Vice-President of Parent and the Stockholder Representative and dispose of such Assets in accordance with the instructions set forth therein. (b) It is understood and agreed that no party to this Agreement shall take any action or omit to take any action pursuant to this Article to the extent that such action or omission would result in the Merger not qualifying for pooling-of-interests accounting treatment under GAAP. 11. Notices. All notices, requests and other communications to any party hereunder shall be in wilting (including facsimile transmission) and shall be given, if to Parent or Merger Sub to: Affymetrix, Inc. 3380 Central Expressway Santa Clara, CA 95051 Attention: General Counsel (Vern Norviel) fax: (408) 481-4709 with copies to: Neil T. Anderson Sullivan & Cromwell 125 Broad Street New York, NY 10004 fax: (212) 558-3588 if to the Stockholder Representative to: Jean Montagu Genetic MicroSystems, Inc. 34 Commerce Way Woburn, MA 01801 fax: (781) 932-9433 with a copy to: Michael E. Lytton Palmer & Dodge LLP One Beacon Street Boston, MA 02108 fax: (617) 227-4420 C-4 162 if to the Escrow Agent to: Bank One Trust Company, NA Global Corporate Trust Services 611 Woodward Avenue, M11-8110 Detroit, Michigan 48226 Attention: Amy J. Brehler Fax: (313) 225-3945 or such other address or facsimile number as such party may hereafter specify for the purpose by notice to the other parties hereto. All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5 p.m. (Eastern Time), and such day is a business day, in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding business day in the place of receipt. 12. The Escrow Agent. (a) The Escrow Agent shall have no duty or obligation hereunder other than to take such specific actions as are required of it from time to time under the provisions hereof, and it shall incur no liability hereunder or in connection herewith for anything whatsoever other than as a result of its own gross negligence or willful misconduct. The party primarily responsible for causing any and all losses, claims, liabilities and expenses, including the reasonable fees of counsel, to the Escrow Agent shall indemnify, hold harmless and defend the Escrow Agent from and against any and all losses, claims, liabilities and expenses, including the reasonable fees of counsel, which it may suffer or incur hereunder, or in connection herewith, except such as shall result solely and directly from the Escrow Agent's own gross negligence or willful misconduct; provided, however, that if no party is primarily responsible for causing such losses, claims, liabilities and expenses, including the reasonable fees of counsel, Parent and the Stockholder Representative shall jointly and severally indemnify the Escrow Agent in accordance with this Section 12. The Escrow Agent shall not be bound in any way by any agreement or contract among Parent, Merger Sub, the Company and the Stockholder Representative (whether or not the Escrow Agent has knowledge thereof) and the only duties and responsibilities of the Escrow Agent shall be to hold the Assets in accordance with the terms of this Escrow Agreement. All reasonable fees and expenses of the Escrow Agent shall be paid 50% by the Stockholder Representative (on behalf of the stockholders of the Company) and 50% by Parent. (b) Notwithstanding any provision contained herein to the contrary, the Escrow Agent, including its officers, directors, employees and agents, shall: (i) have no responsibility to inquire into or determine the genuineness, authenticity, or sufficiency of any securities, checks, or other documents or instruments submitted to it in connection with its duties hereunder; (ii) be entitled to deem the signatories of any documents or instruments submitted to it hereunder as being those purported to be authorized to sign such documents or instruments on behalf of the parties hereto, and shall be entitled to rely upon the genuineness of the signature of such signatories without inquiry and without requiring substantiating evidence of any kind; (iii) have no responsibility or liability for any diminution in value of any assets held hereunder which may result from any investments or reinvestments made in accordance with any provision which may be contained herein; (iv) be entitled to compensation for its services hereunder as per Schedule B, which is attached hereto and made a part hereof, and for reimbursement of its out-of-pocket expenses including, but not by way of limitation, the fees and costs of attorneys or agents which it may find necessary to C-5 163 engage in performance of its duties hereunder, and the Escrow Agent shall have, and is hereby granted, a prior lien upon the Assets with respect to its unpaid fees and non reimbursed expenses, superior to the interests of any other persons or entities; and (iv) be under no obligation to invest the deposited funds or the income generated thereby until it has received a Form W-9 or W-8, as applicable, from each of the parties hereto, regardless of whether any party is exempt from reporting or withholding requirements under the Internal Revenue Code of 1986, as amended. 13. Further Assurances. Subject to the terms and conditions of this Agreement, the parties hereto shall use their reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable to perform their obligations hereunder including, without limitation, determining the amount a Parent Indemnified Party shall be entitled to recover from the Escrow Account and delivering to the Escrow Agent a Joint Certificate or a Final Judgment upon such determination. 14. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the written consent of each other party hereto. Any such purported assignment, delegation or transfer made without such written consent shall be null and void. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of Delaware, without regard to the conflicts of law rules of such state. 16. VENUE; WAIVER OF JURY TRIAL. THE PARTIES HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF DELAWARE AND THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA LOCATED IN THE STATE OF DELAWARE SOLELY IN RESPECT OF THE INTERPRETATION AND ENFORCEMENT OF THE PROVISIONS OF THE TRANSACTION AGREEMENTS, AND IN RESPECT OF THE TRANSACTIONS CONTEMPLATED THEREBY, AND HEREBY WAIVE, AND AGREE NOT TO ASSERT, AS A DEFENSE IN ANY ACTION, SUIT OR PROCEEDING FOR THE INTERPRETATION OR ENFORCEMENT HEREOF OR OF ANY SUCH DOCUMENT, THAT IT IS NOT SUBJECT THERETO OR THAT SUCH ACTION, SUIT OR PROCEEDING MAY NOT BE BROUGHT OR IS NOT MAINTAINABLE IN SAID COURTS OR THAT THE VENUE THEREOF MAY NOT BE APPROPRIATE OR THAT ANY OF THE TRANSACTION AGREEMENTS MAY NOT BE ENFORCED IN OR BY SUCH COURTS, AND THE PARTIES HERETO IRREVOCABLY AGREE THAT ALL CLAIMS WITH RESPECT TO SUCH ACTION OR PROCEEDING SHALL BE HEARD AND DETERMINED IN SUCH A DELAWARE STATE OR FEDERAL COURT. THE PARTIES HEREBY CONSENT TO AND GRANT ANY SUCH COURT JURISDICTION OVER THE PERSON OF SUCH PARTIES AND OVER THE SUBJECT MATTER OF SUCH DISPUTE AND AGREE THAT MAILING OF PROCESS OR OTHER PAPERS IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING IN THE MANNER PROVIDED IN SECTION 11 OR IN SUCH OTHER MANNER AS MAY BE PERMITTED BY LAW SHALL BE VALID AND SUFFICIENT SERVICE THEREOF. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESEN- C-6 164 TATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 16. 17. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by all of the other parties hereto. No provision of this Agreement is intended to confer any rights, benefits, remedies, obligations or liabilities hereunder upon any Person other than the parties hereto and their respective successors and assigns. 18. Resignation or Removal of the Escrow Agent. (a) The Escrow Agent may resign as such upon 30 days' prior written notice to the other parties hereto. The Escrow Agent may be removed and replaced upon 30 days' prior written notice to the Escrow Agent from Parent and the Stockholder Representative. If the Escrow Agent resigns or is removed, the duties of the Escrow Agent shall terminate 30 days after receipt of such notice (or as of such earlier date as may be agreed by the parties hereto) and the Escrow Agent shall then deliver the balance of the Assets then in its possession to a successor escrow agent as shall be appointed by the other parties hereto as evidenced by a written notice filed with the Escrow Agent. (b) If the other parties hereto are unable to agree upon a successor to the Escrow Agent or shall have failed to appoint such successor prior to the expiration of 30 days following receipt of the notice of resignation or removal, the Escrow Agent may petition any court of competent jurisdiction for the appointment of a successor escrow agent or for other appropriate relief, and any such resulting appointment shall be binding upon all of the parties hereto. Upon acknowledgment by any successor escrow agent of the receipt of the balance of the Assets in escrow, the Escrow Agent shall be fully released and relieved of all duties, responsibilities, and obligations under this Agreement. 19. Entire Agreement. This Agreement and the Merger Agreement constitute the entire agreement among the parties with respect to the subject matter of this Agreement and supersede all prior agreements and understandings, both oral and written, among the parties with respect to the subject matter of this Agreement. 20. Captions. The captions herein are included for convenience of reference only and shall be ignored in the construction or interpretation hereof. 21. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such a determination, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner so that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible. 22. Specific Performance. The parties hereto agree that irreparable damage would occur if any provision of this Agreement were not performed in accordance with the terms hereof and that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement or to C-7 165 enforce specifically the performance of the terms and provisions hereof in any court set forth in Section 16 in addition to any other remedy to which they are entitled at law or in equity. 23. Amendments; Waiver. This Agreement may be amended, modified or supplemented in each case only by a written instrument duly executed by or on behalf of the parties to this Agreement. Any of the terms of this Agreement may be waived only by a written instrument duly executed by or on behalf of the parties against whom enforcement is sought and no such waiver by any party of any term or condition contained in this Agreement shall be deemed to be a waiver of the same or any other term or condition of this Agreement on any future occasion. C-8 166 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. AFFYMETRIX, INC. By: /s/ VERN NORVIEL ------------------------------------ Name: Vern Norviel Title: Senior Vice President and General Counsel GMS ACQUISITION, INC. By: /s/ SUSAN E. SIEGEL ------------------------------------ Name: Susan E. Siegel Title: President GENETIC MICROSYSTEMS, INC. By: /s/ JEAN MONTAGU ------------------------------------ Name: Jean Montagu Title: President STOCKHOLDER REPRESENTATIVE /s/ JEAN MONTAGU -------------------------------------- Jean Montagu BANK ONE TRUST COMPANY, NA By: /s/ AMY J. BREHLER ------------------------------------ Name: Amy J. Brehler Title: Authorized Officer C-9 167 APPENDIX D FORM OF STOCKHOLDER VOTING AGREEMENT FORM OF STOCKHOLDER VOTING AGREEMENT, dated as of September 10, 1999 (this "Agreement"), between ("Stockholder") and Affymetrix, Inc., a Delaware corporation ("Purchaser"). WHEREAS, Genetic MicroSystems, Inc., a Massachusetts corporation (the "Company"), Purchaser, GMS Acquisition, Inc., a Massachusetts corporation and a wholly owned subsidiary of Purchaser ("Merger Sub") and Jean Montagu as "Stockholder Representative", are contemporaneously herewith entering into an Agreement and Plan of Merger, dated the date hereof (the "Merger Agreement"), which provides, among other things, for the merger of the Company with and into Merger Sub (the "Merger"); WHEREAS, as a condition to their willingness to enter into the Merger Agreement, Purchaser and Merger Sub have requested that Stockholder make certain agreements with respect to the aggregate number of shares of Common Stock, no par value per share ("Shares"), of the Company set forth opposite the Stockholder's name on Schedule A attached hereto as to all of which Shares the Stockholder has sole voting and dispositive power (such Shares, as such Shares may be adjusted by any stock dividend, stock split, reorganization, combination or exchange of shares, merger, consolidation, reorganization or other change or transaction of or by the Company, being referred to herein as the "Subject Shares"), upon the terms and subject to the conditions hereof; and WHEREAS, in order to induce Purchaser and Merger Sub to enter into the Merger Agreement, Stockholder is willing to make certain agreements with respect to the Subject Shares; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements set forth herein, the parties hereto agree as follows: 1. Voting Agreements; Proxy. (a) For so long as this Agreement is in effect, at any meeting of stockholders of the Company, however called, and in any action by consent of the stockholders of the Company or in any other circumstances upon which a vote, consent or other approval is sought, Stockholder shall vote (or cause to be voted), or, if applicable, give consent or approval with respect to, all of the Subject Shares (and any other Shares over which Stockholder has voting power whether issued heretofore or hereafter) that Stockholder has the right to vote or is able to control the voting of in favor of the Merger Agreement and the Merger and any other transaction contemplated by the Merger Agreement, as such agreement may be modified or amended from time to time. Any such vote shall be cast or consent shall be given in accordance with such procedures relating thereto as shall ensure that it is duly counted for purposes of determining that a quorum is present and for purposes of recording the results of such vote or consent. (b) For so long as this Agreement is in effect, at any meeting of stockholders of the Company, however called, and in any action by consent of the stockholders of the Company or in any other circumstances upon which a vote, consent or other approval is sought, Stockholder shall vote (or cause to be voted), or, if applicable, give consent or approval with respect to, all of the Subject Shares (and any other Shares over which Stockholder has voting power whether issued heretofore or hereafter) that Stockholder has the right to vote, or is able to control the voting of, against (i) any merger or merger agreement (other than the Merger and the Merger Agreement) or any other proposal that would constitute an Acquisition Proposal (as defined in D-1 168 the Merger Agreement), (ii) any amendment to the Company's articles of organization or by-laws and (iii) any other amendment, proposal or transaction involving the Company, which amendment or other proposal or transaction would in any manner impede, frustrate, prevent or nullify the Merger or which is reasonably likely to result in any of the conditions to the Company's obligations under the Merger Agreement not being fulfilled. (c) In furtherance of the transactions contemplated hereby and by the Merger Agreement, and in order to secure the performance of Stockholder of his duties under this Agreement, Stockholder hereby grants to Purchaser and its designees, an irrevocable proxy, or, if applicable, a power of attorney, and irrevocably appoints Purchaser or its designees, with full power of substitution, its attorney and proxy to vote or, if applicable, to give consent with respect to, all Subject Shares with regard to any of the matters referred to in paragraph (a) above at any meeting of the stockholders of the Company, however called, or in connection with any action by written consent by the stockholders of the Company. Stockholder acknowledges and agrees that such proxy is coupled with an interest, constitutes, among other things, an inducement for Purchaser to enter into the Merger Agreement, is irrevocable and shall not be terminated by operation of law or otherwise upon the occurrence of any event (other than as provided in Section 16 hereof) and that no subsequent proxies with respect to the Subject Shares shall be given (and if given shall not be effective). (d) No Limitation on Discretion as Director. Nothing in this Agreement shall be deemed to apply to, or to limit in any manner, the discretion of the Stockholder with respect to any action to be taken (or omitted) by the Stockholder in the Stockholder's fiduciary capacity as a director or officer of the Company including, without limitation, in connection with any action taken in accordance with Section 9.3(a) of the Merger Agreement; provided, however, it is agreed and understood by the parties to this Agreement that the obligations, covenants and agreements of Stockholder contained in this Agreement are separate and apart from the Stockholder's fiduciary duties as a director or officer of the Company and no fiduciary obligations that Stockholder may have as a director or officer of the Company shall countermand the obligations, covenants and agreements of Stockholder, in his capacity as a stockholder of the Company, contained in this Agreement. 2. Covenants. (a) From and after the date of this Agreement, Stockholder agrees not to, and to use best efforts to cause any investment banker, attorney or other adviser or representative of Stockholder not to (i) sell, transfer, pledge, assign, hypothecate, encumber, tender or otherwise dispose of, or enter into any contract, option or other arrangement with respect to the sale, transfer, pledge, assignment, hypothecation, encumbrance, tender or other disposition of the Subject Shares; (ii) grant any proxies with respect to any Subject Shares, deposit any such Subject Shares into a voting trust or enter into a voting or option agreement with respect to any of such Subject Shares; (iii) except to the extent permitted by Section 7.2 of the Merger Agreement with respect to Stockholder's position as an officer or director of the Company, directly or indirectly, solicit, initiate, encourage or otherwise facilitate any inquiries or the making of any proposal or offer with respect to an Acquisition Proposal or engage in any negotiation concerning, or provide any confidential information or data to, or have any discussions with any person relating to an Acquisition Proposal; or (iv) take any action which would make any representation or warranty of Stockholder herein untrue or incorrect or prevent, burden or materially delay the consummation of the transactions contemplated by this Agreement. As used in this Agreement, "person" shall have the meaning specified in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). D-2 169 3. Representations and Warranties of Stockholder. Stockholder represents and warrants to Purchaser that: (a) Capacity; No Violations. Stockholder has the necessary authority to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by Stockholder, and constitutes a valid and binding agreement of Stockholder enforceable against Stockholder in accordance with its terms; and such execution and delivery and performance by Stockholder of this Agreement will not (i) conflict with, require a consent, waiver or approval under, or result in a breach or default under, any of the terms of any governing instrument, contract, commitment or other obligation of Stockholder or to which Stockholder is a party or by which Stockholder is, or the Subject Shares are, bound; (ii) violate any order, writ, injunction, decree or statute, or any law, rule or regulation applicable to Stockholder or the Subject Shares; or (iii) result in the creation of, or impose any obligation on Stockholder to create, any Lien upon the Subject Shares. In this Agreement, "Lien" shall mean any lien, pledge, security interest, claim, third party right or other encumbrance. (b) Subject Shares. Except as set forth on Schedule B to this Agreement, (i) Stockholder is the record holder of, has sole voting and dispositive power over, and has good and valid title to, the Subject Shares free and clear of all Liens and (ii) there are no options or rights to acquire or other contracts (including proxies, voting trusts or voting agreements) relating to the Subject Shares to which Stockholder is a party. Except as otherwise disclosed on Schedule A to this Agreement, as of the date hereof, the Subject Shares are the only shares of any class of capital stock of the Company which Stockholder has the right, power or authority (sole or shared) to sell or vote, and, other than the options on Shares held by Stockholder as of the date hereof, Stockholder does not have any right to acquire, nor is it the beneficial owner of, any other shares of any class of capital stock of the Company or any securities convertible into or exchangeable or exercisable for any shares of any class of capital stock of the Company. (c) Investment Intent. Stockholder is acquiring the shares of Common Stock of purchaser to be received by Stockholder in the Merger (the "Purchaser Shares") for its own account and not with a view to their distribution within the meaning of Section 2.11 of the Securities Act of 1933 ("Securities Act") in any manner that would be in violation of the Securities Act. Stockholder has not, directly or indirectly, offered the Purchaser Shares to anyone or solicited any offer to buy the Purchaser Shares from anyone, so as to bring such offer and sale of the Purchaser Shares by Stockholder within the registration requirements of the Securities Act. Stockholder will not sell, convey, transfer or offer for sale any of the Purchaser Shares except upon compliance with the Securities Act and any applicable state securities laws or pursuant to any exemption therefrom. (d) Accredited Investor Status. Stockholder is and at the time of delivery of any Purchaser Shares will be an "accredited investor" within the meaning of Regulation D promulgated under the Securities Act. Stockholder has, and at the time of such delivery will have, such knowledge and experience in financial and business matters that Stockholder is and will be capable of evaluating the merits and risks of an investment in Purchaser Shares and represents and warrants that Stockholder has not received and will not receive any representations from Purchaser or any of its officers or representatives with regard to the Purchaser Shares or Purchaser. 4. Adjustments; Additional Shares. In the event (i) of any stock dividend, stock split, recapitalization, reclassification. combination or exchange of Shares on, of or affecting the Subject Shares, or (ii) Stockholder shall become the beneficial owner of any additional Shares or other securities entitling the holder thereof to vote or give consent with respect to the matters set forth in Section 1 hereof, then such Shares held by Stockholder immediately following the effectiveness of the D-3 170 events described in clause (i) or Stockholder becoming the beneficial owner of the Shares or other securities, as described in clause (ii) shall become Subject Shares hereunder. 5. Expenses. Each party hereto shall pay its own expenses incurred in connection with this Agreement. 6. Specific Performance. Stockholder acknowledges and agrees that if it fails to perform any of its obligations under this Agreement immediate and irreparable harm or injury would be caused to Purchaser for which money damages would not be an adequate remedy. In such event, Stockholder agrees that Purchaser shall have the right, in addition to any other rights it may have, to specific performance of this Agreement. Accordingly, if Purchaser should institute an action or proceeding seeking specific enforcement of the provisions hereof, Stockholder hereby waives the claim or defense that Purchaser has an adequate remedy at law and hereby agrees not to assert in any such action or proceeding the claim or defense that such a remedy at law exists. Stockholder further agrees to waive any requirements for the securing or posting of any bond in connection with obtaining any such equitable relief. 7. Appointment of Stockholder Representative. Stockholder hereby consents in all respects to the appointment of Jean Montagu as Stockholder Representative and to the performance by the Stockholder Representative of all rights and obligations conferred on the Stockholder Representative under the Merger Agreement and the Escrow Agreement. 8. Notices. All notices or other communications under this Agreement shall be in writing and shall be deemed duly given, effective (i) three business days later, if sent by registered or certified mail, return receipt requested, postage prepaid, (ii) when sent, if sent by facsimile, provided that the facsimile is promptly confirmed by telephone confirmation thereof, (iii) when served, if delivered personally to the intended recipient, and (iv) one business day later, if sent by overnight delivery via a national courier service, and in each case, addressed to the intended recipient at the address set forth in the preamble hereof. Any party may change the address to which notices or other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth: If to the Purchaser: Affymetrix, Inc. 3380 Central Expressway Santa Clara, CA 95051 Attention: General Counsel (Vern Norviel) Phone: (408) 731-5035 Fax: (408) 481-4709 With a copy to: Sullivan & Cromwell 125 Broad Street New York, New York 10004 Attention: Neil T. Anderson Phone: (212) 558-4000 Fax: (212) 558-3588 If to Stockholder: To the address for notice set forth on Schedule A to this Agreement. D-4 171 With a copy to: Palmer & Dodge LLP One Beacon Street Boston, MA 02115 Attention: Michael E. Lytton Phone: (617) 573-0100 Fax: (617) 227-4420 9. Parties in Interest. This Agreement shall inure to the benefit of and be binding upon the parties named herein and their respective successors and assigns; provided, however, that such successor in interest or assigns shall agree to be bound by the provisions of this Agreement. Nothing in this Agreement, express or implied, is intended to confer upon any Person other than Purchaser, Stockholder or their successors or assigns, any rights or remedies under or by reason of this Agreement. 10. Entire Agreement; Amendments. This Agreement contains the entire agreement between Stockholder and Purchaser with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings, oral or written, with respect to such transactions. This Agreement may not be changed, amended or modified orally, but may be changed only by an agreement in writing signed by the party against whom any waiver, change, amendment, modification or discharge may be sought. 11. Assignment. No party to this Agreement may assign any of its rights or obligations under this Agreement without the prior written consent of the other party hereto, except that Purchaser may assign its rights and obligations hereunder to any of its direct or indirect wholly owned subsidiaries (including Merger Sub), but no such transfer shall relieve Purchaser of its obligations hereunder if such transferee does not perform such obligations. 12. Further Assurances. The Stockholder will, from time to time, execute and deliver, or cause to be executed and delivered, such additional or further transfers, assignments, endorsements, consents and other instruments as Purchaser may reasonably request for the purpose of effectively carrying out the transactions contemplated by this Agreement. 13. Headings. The section headings herein are for convenience only and shall not affect the construction of this Agreement. 14. Counterparts. This Agreement may be executed in any number of counterparts, each of which, when executed, shall be deemed to be an original and all of which together shall constitute one and the same document. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware (regardless of the laws that might otherwise govern under applicable Delaware principles of conflicts of law). 16. Termination. This Agreement shall terminate at the earlier of (i) the Effective Time (as defined in the Merger Agreement) and (ii) the termination of the Merger Agreement. D-5 172 IN WITNESS WHEREOF, Purchaser and Stockholder have caused this Agreement to be duly executed and delivered on the day and year first above written. AFFYMETRIX, INC. By: ------------------------------------ Name: Title: -------------------------------------- [Stockholder] D-6 173 APPENDIX E MASSACHUSETTS LAW REGARDING APPRAISAL RIGHTS SECTION 86. SECTIONS APPLICABLE TO APPRAISAL; PREREQUISITES If a corporation proposes to take a corporate action as to which any section of this chapter provides that a stockholder who objects to such action shall have the right to demand payment for his shares and an appraisal thereof, sections eighty-seven to ninety-eight, inclusive, shall apply except as otherwise specifically provided in any section of this chapter. Except as provided in sections eighty-two and eight-three, no stockholder shall have such right unless (1) he files with the corporation before the taking of the vote of the shareholders on such corporate action, written objection to the proposed action stating that he intends to demand payment for his shares if the action is taken and (2) his shares are not voted in favor of the proposed action. SECTION 87. STATEMENT OF RIGHTS OF OBJECTING STOCKHOLDERS IN NOTICE OF MEETING; FORM The notice of the meeting of stockholders at which the approval of such proposed action is to be considered shall contain a statement of the rights of objecting stockholders. The giving of such notice shall not be deemed to create any rights in any stockholder receiving the same to demand payment for his stock, and the directors may authorize the inclusion in any such notice of a statement of opinion by the management as to the existence or non-existence of the right of the stockholders to demand payment for their stock on account of the proposed corporate action. The notice may be in such form as the directors or officers calling the meeting deem advisable, but the following form of notice shall be sufficient to comply with this section: "If the action proposed is approved by the stockholders at the meeting and effected by the corporation, any stockholder (1) who files with the corporation before the taking of the vote on the approval of such action, written objection to the proposed action stating the he intends to demand payment for his shares if the action is taken and (2) whose shares are not voted in favor of such action has or may have the right to demand in writing from the corporation (or, in the case of a consolidation or merger, the name of the resulting or surviving corporation shall be inserted), within twenty days after the date of mailing to him of notice in writing that the corporate action has become effective, payments for his shares and an appraisal of the value thereof. Such corporation and any such stockholder shall in such cases have the rights and duties and shall follow the procedure set forth in sections 88 to 98, inclusive, of chapter 156B of the General Laws of Massachusetts." SECTION 88. NOTICE OF EFFECTIVENESS OF ACTION OBJECTED TO The corporation taking such action, or in the case of a merger or consolidation the surviving or resulting corporation, shall, within ten days after the date on which such corporate action became effective, notify each stockholder who filed a written objection meeting the requirements of section eighty-six and whose shares were not voted in favor of the approval of such action, that the action approved at the meeting of the corporation of which he is a stockholder has become effective. The giving of such notice shall not be deemed to create any rights in any stockholder receiving the same to demand payment for his stock. The notice shall be sent by registered or certified mail, addressed to the stockholder at his last known address as it appears in the records of the corporation. E-1 174 SECTION 89. DEMAND FOR PAYMENT; TIME FOR PAYMENT If within twenty days after the date of mailing of a notice under subsection (e) of section eight-two, subsection (f) of section eighty-three, or section eighty-eight, any stockholder to whom the corporation was required to give such notice shall demand in writing from the corporation taking such action, or in the case of a consolidation or merger from the resulting or surviving corporation, payment for his stock, the corporation upon which such demand is made shall pay to him the fair value of his stock within thirty days after the expiration of the period during which such demand may be made. SECTION 90. DEMAND FOR DETERMINATION OF VALUE; BILL IN EQUITY; VENUE If during the period of thirty days provided for in section eighty-nine the corporation upon which such demand is made and any such objecting stockholder fail to agree as to the value of such stock, such corporation or any such stockholder may within four months after the expiration of such thirty-day period demand a determination of the value of the stock of all such objecting stockholders by a bill in equity filed in the superior court in the county where the corporation in which such objecting stockholder held stock had or has its principal office in the commonwealth. SECTION 91. PARTIES TO SUIT TO DETERMINE VALUE; SERVICE If the bill is filed by the corporation, it shall name as parties respondent all stockholders who have demanded payment for their shares and with whom the corporation has not reached agreement as to the value thereof. If the bill is filed by a stockholder, he shall bring the bill in his own behalf and in behalf of all other stockholders who have demanded payment for their shares and with whom the corporation has not reached agreement as to the value thereof, and service of the bill shall be made upon the corporation by subpoena with a copy of the bill annexed. The corporation shall file with its answer a duly verified list of all such other stockholders, and such stockholders shall thereupon be deemed to have been added as parties to the bill. The corporation shall give notice in such form and returnable on such date as the court shall order to each stockholder party to the bill by registered or certified mail, addressed to the last known address of such stockholder as shown in the records of the corporation, and the court may order such additional notice by publication or otherwise as it deems advisable. Each stockholder who makes demand as provided in section eighty-nine shall be deemed to have consented to the provisions of this section relating to notice, and the giving of notice by the corporation to any such stockholder in compliance with the order of the court shall be a sufficient service of process on him. Failure to give notice to any stockholder making demand shall not invalidate the proceedings as to other stockholders to whom notice was properly given, and the court may at any time before the entry of a final decree make supplementary orders of notice. SECTION 92. DECREE DETERMINING VALUE AND ORDERING PAYMENT; VALUATION DATE After hearing the court shall enter a decree determining the fair value of the stock of those stockholders who have become entitled to the valuation of and payment for their shares, and shall order the corporation to make payment of such value, together with interest, if any, as hereinafter provided, to the stockholders entitled thereto upon the transfer by them to the corporation of the certificates representing such stock if certificated or, if uncertificated, upon receipt of an instruction transferring such stock to the corporation. For this purpose, the value of the shares shall be determined as of the day preceding the date of the vote approving the proposed corporate action and E-2 175 shall be exclusive of any element of value arising from the expectation or accomplishment of the proposed corporate action. SECTION 93. REFERENCE TO SPECIAL MASTER The court in its discretion may refer the bill or any question arising thereunder to a special master to hear the parties, make findings and report the same to the court, all in accordance with the usual practice in suits in equity in the superior court. SECTION 94. NOTATION ON STOCK CERTIFICATES OF PENDENCY OF BILL On motion the court may order stockholder parties to the bill to submit their certificates of stock to the corporation for the notation thereon of the pendency of the bill and may order the corporation to note such pendency in its records with respect to any uncertificated shares held by such stockholders parties, and may on motion dismiss the bill as to any stockholder who fails to comply with such order. SECTION 95. COSTS; INTEREST The costs of the bill, including the reasonable compensation and expenses of any master appointed by the court, but exclusive of fees of counsel or of experts retained by any party, shall be determined by the court and taxed upon the parties to the bill, or any of them, in such manner as appears to be equitable, except that all costs of giving notice to stockholders as provided in this chapter shall be paid by the corporation. Interest shall be paid upon any award from the date of the vote approving the proposed corporate action, and the court may on application of any interested party determine the amount of interest to be paid in the case of any stockholder. SECTION 96. DIVIDENDS AND VOTING RIGHTS AFTER DEMAND FOR PAYMENT Any stockholder who has demanded payment for his stock as provided in this chapter shall not thereafter be entitled to notice of any meeting of stockholders or to vote such stock for any purpose and shall not be entitled to the payment of dividends or other distribution on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the date of the vote approving the proposed corporate action) unless: (1) bill shall not be filed within the time provided in section ninety; (2) A bill, if filed, shall be dismissed as to such stockholder; or (3) Such stockholder shall with the written approval of the corporation, or in the case of a consolidation or merger, the resulting or surviving corporation, deliver to it a written withdrawal of his objections to and an acceptance of such corporate action. Notwithstanding the provisions of clauses (1) to (3), inclusive, said stockholder shall have only the rights of a stockholder who did not so demand payment for his stock as provided in this chapter. SECTION 97. STATUS OF SHARES PAID FOR The shares of the corporation paid for by the corporation pursuant to the provisions of this chapter shall have the status of treasury stock, or in the case of a consolidation or merger the shares or the securities of the resulting or surviving corporation into which the shares of such objecting E-3 176 stockholder would have been converted had he not objected to such consolidation or merger shall have the status of treasury stock or securities. SECTION 98. EXCLUSIVE REMEDY; EXCEPTION The enforcement by a stockholder of his right to receive payment for his shares in the manner provided in this chapter shall be an exclusive remedy except that this chapter shall not exclude the right of such stockholder to bring or maintain an appropriate proceeding to obtain relief on the ground that such corporate action will be or is illegal or fraudulent as to him. E-4 177 APPENDIX F GENETIC MICROSYSTEMS, INC. INDEX TO FINANCIAL STATEMENTS Report of Independent Auditors.............................. F-2 Audited Financial Statements -- Year ended December 31, 1998 and period from August 7, 1997 (date of inception) to December 31, 1997 Balance Sheets.............................................. F-3 Statements of Operations and Comprehensive Loss............. F-4 Statements of Shareholders' Equity (Deficit)................ F-5 Statements of Cash Flows.................................... F-6 Notes to Financial Statements............................... F-7 Unaudited Condensed Financial Statements -- Six month periods ended July 3, 1999 and June 30, 1998 Condensed Balance Sheet..................................... F-14 Condensed Statements of Operations and Comprehensive Loss... F-15 Condensed Statements of Cash Flows.......................... F-16 Notes to Condensed Financial Statements..................... F-17
F-1 178 REPORT OF INDEPENDENT AUDITORS Board of Directors Genetic MicroSystems, Inc. We have audited the accompanying balance sheets of Genetic MicroSystems, Inc. (the Company) as of December 31, 1998 and 1997, and the related statements of operations and comprehensive loss, shareholders' equity (deficit), and cash flows for the year ended December 31, 1998 and the period from August 7, 1997 (date of inception) to December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the year ended December 31, 1998 and the period from August 7, 1997 (date of inception) to December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Boston, Massachusetts January 12, 1999 F-2 179 GENETIC MICROSYSTEMS, INC. BALANCE SHEETS
DECEMBER 31 ------------------------- 1998 1997 ---------- ----------- ASSETS Current assets: Cash and cash equivalents................................. $4,365,446 $ 33,654 Available-for-sale equity securities...................... 1,518,000 Accounts receivable....................................... 213,575 Inventories............................................... 421,809 Prepaid expenses and other assets......................... 87,356 11,115 ---------- ----------- Total current assets.............................. 5,088,186 1,562,769 Property and equipment, net................................. 605,811 94,766 Deposits.................................................... 64,000 ---------- ----------- $5,757,997 $ 1,657,535 ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 252,569 $ 138,152 Accrued expenses.......................................... 291,159 46,342 Due to shareholder........................................ 120,000 Deferred tax liability.................................... 540,665 ---------- ----------- Total current liabilities......................... 543,728 845,159 Deferred rent............................................... 49,529 Common stock purchase rights................................ 3,000,000 Series B Redeemable Convertible Preferred Stock, $.01 par value; 582,353 shares authorized; 347,134 shares issued and outstanding (aggregate liquidation preference of $2,950,639)............................................... 2,950,639 Shareholders' equity (deficit): Series A Convertible Preferred Stock, $.01 par value; 2,054,000 shares authorized; 2,000,000 shares issued and outstanding (aggregate liquidation preference of $4,000,000)............................................ 20,000 Common Stock, no par value; 5,000,000 shares in 1998 and 200,000 shares in 1997 authorized; 1,048,000 shares in 1998 and 10,000 shares in 1997 issued.................. 215,600 120,000 Additional paid-in capital................................ 3,075,218 1,587,924 Notes receivable from shareholders........................ (159,840) Treasury Stock (46,864 shares of Common Stock, at cost)... (12,933) Unrealized loss on available-for-sale equity securities... (641,777) Accumulated deficit....................................... (3,923,944) (253,771) ---------- ----------- Total shareholders' equity (deficit).............. (785,899) 812,376 ---------- ----------- $5,757,997 $ 1,657,535 ========== ===========
See accompanying notes. F-3 180 GENETIC MICROSYSTEMS, INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
PERIOD FROM YEAR ENDED AUGUST 7, 1997 DECEMBER 31, (DATE OF INCEPTION) 1998 TO DECEMBER 31, 1997 ------------ -------------------- Revenues: Net product sales.................................... $ 287,625 Licensing revenue.................................... 99,980 ----------- 387,605 Costs and expenses: Costs of sales....................................... 367,605 Research and development............................. 2,479,915 $ 421,694 Selling, general and administrative.................. 1,877,541 59,159 ----------- --------- 4,725,061 480,853 ----------- --------- Loss from operations................................... (4,337,456) (480,853) Other income (expense): Gain (loss) on sale of available-for-sale equity securities........................................ (664,505) 57,082 Interest and dividend income......................... 63,172 ----------- --------- (601,333) 57,082 ----------- --------- Loss before income tax benefit......................... (4,938,789) (423,771) Income tax benefit..................................... 1,268,616 170,000 ----------- --------- Net loss............................................... (3,670,173) (253,771) Change in unrealized loss on available-for-sale equity securities........................................... 641,777 (641,777) ----------- --------- Comprehensive net loss................................. $(3,028,396) $(895,548) =========== ========= Loss per share: Net loss per share -- basic and diluted.............. $ 6.21 $ 25.38 =========== ========= Comprehensive net loss per share -- basic and diluted........................................... $ 5.12 $ 89.55 =========== ========= Weighted average common shares -- basic and diluted........................................... 591,227 10,000 =========== =========
See accompanying notes. F-4 181 GENETIC MICROSYSTEMS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
NOTES SERIES A CONVERTIBLE ADDITIONAL RECEIVABLE PREFERRED STOCK COMMON STOCK PAID-IN FROM SHARES AMOUNTS SHARES AMOUNTS CAPITAL SHAREHOLDERS ---------- -------- --------- ----------- ---------- ------------ Issuance of Common Stock in exchange for contribution of available-for-sale securities to capital, net of deferred taxes of $1,138,616............................... 10,000 $ 120,000 $1,587,924 Unrealized loss on available-for-sale securities, net of deferred taxes of $427,951.................................... Net loss for the period from August 7, 1997 (date of inception) to December 31, 1997.... --------- ----------- ---------- BALANCE AT DECEMBER 31, 1997.................. 10,000 120,000 1,587,924 Change in unrealized loss..................... Contribution of available-for-sale securities to capital, net of deferred taxes of $300,000.................................... 450,000 Contribution of cash.......................... 10,082 Issuance of Common Stock in exchange for capital contributions....................... 140,000 2,048,006 (2,048,006) Conversion of Common Stock into Series A Convertible Preferred Stock in 1998......... 1,500,000 $15,000 (150,000) (2,168,006) 2,153,006 Issuance of Series A Convertible Preferred Stock in 1998............................... 500,000 5,000 952,212 Issuance of Common Stock...................... 1,048,000 215,600 (30,000) $(213,600) Repurchase of Treasury Stock.................. 12,600 Net loss...................................... Collection of notes receivable from stockholders................................ 41,160 --------- ------- --------- ----------- ---------- --------- BALANCE AT DECEMBER 31, 1998.................. 2,000,000 $20,000 1,048,000 $ 215,600 $3,075,218 $(159,840) ========= ======= ========= =========== ========== ========= UNREALIZED DEFICIT LOSS ON ACCUMULATED AVAILABLE- DURING THE TREASURY FOR-SALE DEVELOPMENT STOCK SECURITIES STAGE -------------- ---------- ----------- Issuance of Common Stock in exchange for contribution of available-for-sale securities to capital, net of deferred taxes of $1,138,616............................... Unrealized loss on available-for-sale securities, net of deferred taxes of $427,951.................................... $(641,777) Net loss for the period from August 7, 1997 (date of inception) to December 31, 1997.... $ (253,771) --------- ----------- BALANCE AT DECEMBER 31, 1997.................. (641,777) (253,771) Change in unrealized loss..................... 641,777 Contribution of available-for-sale securities to capital, net of deferred taxes of $300,000.................................... Contribution of cash.......................... Issuance of Common Stock in exchange for capital contributions....................... Conversion of Common Stock into Series A Convertible Preferred Stock in 1998......... Issuance of Series A Convertible Preferred Stock in 1998............................... Issuance of Common Stock...................... Repurchase of Treasury Stock.................. $(12,933) Net loss...................................... (3,670,173) Collection of notes receivable from stockholders................................ -------- --------- ----------- BALANCE AT DECEMBER 31, 1998.................. $(12,933) $ -0- $(3,923,944) ======== ========= ===========
See accompanying notes. F-5 182 GENETIC MICROSYSTEMS, INC. STATEMENTS OF CASH FLOWS
PERIOD FROM AUGUST 7, 1997 YEAR ENDED (DATE OF INCEPTION) DECEMBER 31, TO DECEMBER 31, 1998 1997 ------------ ------------------- OPERATING ACTIVITIES Net loss................................................. $(3,670,173) $(253,771) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................... 103,198 13,918 Deferred taxes......................................... (1,268,616) (170,000) Deferred rent.......................................... 49,529 Gain (loss) on sale of available-for-sale equity securities.......................................... 664,505 (57,082) Changes in operating assets and liabilities: Prepaid expenses and other assets................... (140,241) (11,115) Accounts receivable................................. (213,575) Inventories......................................... (421,809) Accounts payable and accrued expenses............... 359,234 184,494 ----------- --------- Net cash used in operating activities.................... (4,537,948) (293,556) INVESTING ACTIVITIES Purchase of property and equipment....................... (614,243) (108,684) Sale of available-for-sale equity securities............. 2,673,223 315,894 ----------- --------- Net cash provided by investing activities................ 2,058,980 207,210 FINANCING ACTIVITIES Issuance of Series A and B Preferred Stock............... 3,877,851 Issuance of Common Stock purchase rights................. 3,000,000 Capital contribution..................................... 10,082 Issuance of Common Stock................................. 2,000 Purchase of Treasury Stock............................... (333) Collection of notes receivable from shareholders......... 41,160 Due to shareholder....................................... (120,000) 120,000 ----------- --------- Net cash provided by financing activities................ 6,810,760 120,000 ----------- --------- Increase in cash and cash equivalents.................... 4,331,792 33,654 Cash and cash equivalents at beginning of period......... 33,654 ----------- --------- Cash and cash equivalents at end of period............... $ 4,365,446 $ 33,654 =========== =========
See accompanying notes. F-6 183 GENETIC MICROSYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 1. BASIS OF PRESENTATION THE COMPANY Genetic MicroSystems, Inc. (the Company) was incorporated on August 7, 1997 to develop, manufacture and sell a new generation of enabling products for genomics research and drug discovery. The Company was a development-stage company until the commencement of substantial operations in 1998 and has operated in a single segment since inception. RISKS AND UNCERTAINTIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. 2. SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS Cash equivalents consist of those highly liquid investments having maturities of three months or less at the date of purchase. The carrying value of cash equivalents approximates fair value. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents and available-for-sale securities. The Company invests its excess cash primarily in high-quality securities. Available-for-sale securities represented shares of common stock of a publicly traded company contributed to the Company by the founding shareholder. These securities were sold for cash by the Company based on the working capital requirements of the Company. AVAILABLE-FOR-SALE EQUITY SECURITIES The Company classifies its equity securities contributed by its founding shareholder as available-for-sale, which are reported at fair value, in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under SFAS No. 115, unrealized holding gains and losses on available-for-sale securities are excluded from income and reported as a separate component in shareholders' equity, net of applicable taxes. Realized gains and losses from securities classified as available-for-sale are included in income using the specific-identification method for determining the cost of investments sold. INVENTORIES Inventories, which consist of purchased components, units in process and finished units, are valued at the lower of cost (first-in, first-out) or market. F-7 184 GENETIC MICROSYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Provisions for depreciation and amortization on property and equipment are computed using the straight-line method over expected useful lives of the assets as follows:
ESTIMATED USEFUL LIFE --------------------------------------------- Equipment 3-5 years Leasehold improvements Term of the lease or useful life, whichever is shorter.
REVENUE RECOGNITION Product sales are recognized at the time finished units are shipped. License revenue is recognized as earned based on the terms of the related license agreement. RESEARCH AND DEVELOPMENT Research and development costs are charged to operations as incurred. LOSS PER SHARE Loss per share is presented in accordance with SFAS No. 128, Earnings Per Share, which requires the disclosure of basic and diluted earnings (loss) per share. Basic loss per share is based upon the Company's net loss divided by the number of weighted shares outstanding during the reporting period. Diluted loss per share for loss periods is the same as basic loss per share since the effect of including the conversion of preferred stock and common stock equivalents of warrants, options and other stock rights is anti-dilutive. STOCK-BASED COMPENSATION As provided for under SFAS No. 123, Accounting for Stock Based Compensation, the Company accounts for stock-based compensation for employees based on the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). The Company discloses, as required under SFAS No. 123, pro forma net loss in the notes to the financial statements as if the measurement provisions of SFAS No. 123 had been adopted. The Company accounts for stock-based compensation to nonemployees based on the provisions of SFAS No. 123. RECENT ACCOUNTING PRONOUNCEMENT In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income, which requires presentation of a statement of comprehensive income that adjusts net income (loss) and net income (loss) per share for changes in unrealized gains and losses from available-for-sale securities. The adoption of this Standard is reflected in the statements of operations and comprehensive loss for each period presented. F-8 185 GENETIC MICROSYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. AVAILABLE-FOR-SALE EQUITY SECURITIES Information related to this balance at December 31, 1997 is as follows:
MARKET UNREALIZED COST VALUE HOLDING LOSS ---------- ---------- ------------ Equity securities......................... $2,587,728 $1,518,000 $1,069,728 Deferred income tax benefit............... 427,951 ---------- Net unrealized holding loss............... $ 641,777 ==========
4. INVENTORIES Inventories consist of the following at December 31, 1998: Purchased components........................................ $288,439 Units in process............................................ 102,035 Finished units.............................................. 31,335 -------- $421,809 ========
5. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31:
1998 1997 -------- -------- Equipment................................................. $606,945 $102,465 Leasehold improvements.................................... 115,982 6,219 -------- -------- 722,927 108,684 Less accumulated depreciation and amortization............ 117,116 13,918 -------- -------- $605,811 $ 94,766 ======== ========
6. ACCRUED EXPENSES The balance consists of the following at December 31:
1998 1997 -------- ------- Accrued compensation and related taxes..................... $164,575 $13,042 Other...................................................... 126,584 33,300 -------- ------- $291,159 $46,342 ======== =======
7. OPERATING LEASE The Company leases its present offices under an operating lease expiring in 2001. At December 31, 1998, future minimum lease payments amounted to $316,000 in 1999, $316,000 in F-9 186 GENETIC MICROSYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2000 and $78,978 in 2001. Rent expense amounted to $230,000 in 1998 and $4,800 for the period from August 7, 1997 to December 31, 1997. The Company's lease contains certain rent inducements which are being amortized over the term of the lease. The unamortized balance of the deferred rent amounted to $49,529 at December 31, 1998. 8. COMMON STOCK PURCHASE RIGHTS In August 1998, the Company entered into an agreement with Takara Shuzo Co. Ltd. (Takara), a distributor, which calls for the sale of microarray manufacturing instruments and the sale of microarray manufacturing services utilizing the Company's equipment, provided a 5% royalty is paid to the Company for the sale of these services. The agreement also provides for the purchase, subject to certain requirements, of the Company's shares by Takara through an advance payment of $3.0 million, which has been included in the caption of common stock purchase rights in the accompanying financial statements. The number of shares issuable will be determined on August 19, 2003 (Closing) based on the fair market value of the Company's stock at the time. Of the $3 million advance, $2 million is repayable to Takara if certain milestones with respect to the instrumentation have not been met. To the extent the two remaining milestone payments are returned to Takara due to the Company's nonperformance, the Company is to issue Takara shares of Common Stock equal to $1.0 million divided by the fair market value of the stock at the Closing. In no event is the number of common shares issued to Takara to exceed 10% of the total shares of outstanding Common Stock of the Company at the time of the Closing. In the event that the Company's common stock issuable to Takara is valued at less than $3.0 million or the amount not returned to Takara, as described above, the Company will pay Takara the difference between the value of the Company's common stock and $3.0 million or the amount not returned to Takara. In connection with the agreement, the Company granted an employee warrants to purchase 10% of the Common Stock ultimately issued to Takara at the fair market value of the Common Stock on the date the shares are issued. F-10 187 GENETIC MICROSYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES Deferred income taxes consist of the following at December 31:
1998 1997 --------- --------- Deferred tax asset: Net operating loss carryforwards...................... $ 120,000 $ 56,535 Start-up costs........................................ 520,000 10,000 --------- --------- 640,000 66,535 Valuation allowance................................... (640,000) --------- --------- 0 66,535 Deferred tax liability: Book basis of available-for-sale equity securities in excess of tax basis................................ (607,200) --------- --------- Net deferred tax liability............................ $ 0 $(540,665) ========= =========
The income tax benefit of $1,268,166 in 1998 and $170,000 in 1997 represents the elimination of deferred tax liabilities recognized in connection with the capital contributions described in Note 10, which are no longer payable due to operating losses incurred by the Company in 1997 and 1998. At December 31, 1998, the Company had net operating loss carryforwards for income tax reporting purposes of approximately $300,000 to offset future federal taxable income, which begin to expire in 2012. A full valuation allowance has been established due to the uncertainty of the realization of these benefits in future years. In accordance with section 382 of the Internal Revenue Code, the use of the above carryforward will be subject to annual limitations based upon ownership changes of the Company's stock which have occurred. 10. SHAREHOLDERS' CAPITAL COMMON STOCK The Company's founding shareholder contributed 150,000 shares of marketable equity securities with a fair value (based on quoted market values) of $2.2 million, net of applicable taxes, to the Company in 1997 and 1998. These capital contributions have been recorded net of applicable taxes since the tax basis of the marketable equity securities contributed to the Company is nominal and the Company is required to pay the applicable income taxes based on the fair value of the investments when the investments are sold. In 1998, the Company sold 1,048,000 shares of restricted Common Stock to certain employees in exchange for notes receivable due in 2003. The notes receivable bear interest at the applicable minimum federal rate and are collateralized by the shares of Common Stock. PREFERRED STOCK Series A Convertible Preferred Stock Each share of Series A Convertible Preferred Stock has the same number of Common Stock votes as its conversion rights provide, as defined in the amended Articles of Incorporation. Holders of Series A Convertible Preferred Stock have preference over Common shareholders with respect to F-11 188 GENETIC MICROSYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) payment of dividends and distribution of assets in the event of liquidation. Holders of Series A Convertible Preferred Stock are entitled to a liquidation value of $2.00 per share, respectively, plus all declared and unpaid dividends as of the liquidation date. Each share of Series A Convertible Preferred Stock is convertible at any time into the number of shares of Common Stock which results from dividing the conversion price per share in effect at the time of conversion into $2.00 per share for each share of Series A Convertible Preferred Stock being converted and automatically convert upon an initial public offering. The conversion price is subject to adjustment for, among other things, stock splits, dividends and recapitalizations, as defined in the Articles of Incorporation. Series B Redeemable Convertible Preferred Stock Each share of Series B Redeemable Convertible Preferred Stock has the same number of common stock votes as its conversion rights provide, as defined in the amended Articles of Incorporation. Holders of Series B Redeemable Convertible Preferred Stock have preference over holders of Series A Convertible Preferred Stock who have preference over Common Stockholders with respect to payment of dividends and distribution of assets in the event of liquidation. Holders of Series A Convertible Preferred Stock are entitled to a liquidation value of $8.50 per share, respectively, plus all declared and unpaid dividends as of the liquidation date. Each share of Series B Redeemable Convertible Preferred Stock is convertible at any time into the number of shares of Common Stock which results from dividing the conversion price per share in effect at the time of conversion into $8.50 per share for each share of Series A Convertible Preferred Stock being converted and automatically convert upon an initial public offering. The conversion price is subject to adjustment for, among other things, stock splits, dividends and recapitalization, as defined in the Articles of Incorporation. The Company is required, at the option of the majority of Series B Redeemable Convertible Preferred stockholders, to redeem one-third of the shares on December 30, 2004, 2005 and 2006, respectively, at $8.50 per share plus all declared and unpaid dividends. Series A and B Preferred Stock Warrants In connection with the sale of Series A Preferred Stock, the Company issued warrants to an employee and a vendor to purchase 50,000 and 4,000 shares, respectively, of Series A Preferred Stock at $2.00 per share which expire in 2008. Additionally, in connection with the sale of Series B Preferred Stock, the Company issued warrants to an employee to purchase 34,713 shares of Series B Preferred Stock at $8.50 per share which expire in 2008. The Company has also entered into an agreement with an employee that obligates the Company to issue options, at the same price as any new equity raised up to $13.5 million, to preserve his percentage of the Company. In the event this occurs, the Company intends to settle this obligation by issuing additional options or making a cash payment. If no settlement agreement is reached, the obligation will continue until the earlier of the date at which $13.5 million is raised or December 31, 2004. F-12 189 GENETIC MICROSYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) STOCK OPTION PLAN The Company's Stock Plan allows for the granting of options to purchase 300,000 shares of Common Stock. Options generally vest over four years and expire ten years from the grant date or 90 days from termination of employment, whichever is sooner. Pro forma information regarding net loss was computed in accordance with SFAS No. 123 and has been determined as if the Company accounted for its employee stock options granted under the fair value methods of that Statement. The fair value of these options was estimated at the date of grant using the minimal value option pricing model with the following weighted-average assumptions for 1998: risk-free interest rate of 5.4%, dividend yield of 0% and a weighted-average expected life of the option of 4.0 years. The pro forma net loss and net loss per share as computed under SFAS No. 123 for 1998 amounted to $3,030,096 and $5.13 per share, respectively. The following table presents the option activity for the year ended December 31, 1998:
WEIGHTED- AVERAGE EXERCISE SHARES PRICE ------ --------- Outstanding at beginning of year............................ 0 Granted..................................................... 60,000 $.34 ------ ---- Outstanding at end of year.................................. 60,000 $.34 ====== ====
The weighted average per share fair value of options granted during 1998 was $.07. At December 31, 1998, there were 240,000 options available for grant under the Plan. There were no options exercisable at December 31, 1998. The Company has reserved 3,021,066 shares of Common Stock at December 31, 1998 for conversion of Preferred Stock and exercise of options and warrants to purchase Common Stock. 11. NONCASH FINANCING ACTIVITIES In 1998, 140,000 shares of Common Stock were issued in exchange for $10,082 of cash and $2,048,006 of available-for-sale securities previously contributed to the Company. These shares, along with 10,000 shares of Common Stock, were then converted into 1.5 million shares of Series A Convertible Preferred Stock. F-13 190 INTERIM UNAUDITED CONDENSED FINANCIAL STATEMENTS JULY 3, 1999 GENETIC MICROSYSTEMS, INC. BALANCE SHEET (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 2,526,577 Available for sale securities............................. -- Accounts receivable, net of allowance of $75,603 for doubtful accounts...................................... 1,999,759 Inventories............................................... 999,361 Prepaid expenses and other assets......................... 70,561 ----------- Total current assets........................................ 5,596,258 Property and equipment, net................................. 732,767 Deposits.................................................... 64,000 ----------- $ 6,393,025 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 773,280 Accrued expenses.......................................... 534,901 Due to shareholder........................................ -- Deferred revenue.......................................... 543,837 ----------- Total current liabilities................................... 1,852,018 Deferred rent............................................... 38,099 Common stock purchase rights................................ 3,000,000 Series B Redeemable Convertible Preferred Stock, $.01 par value; 582,353 shares authorized; 431,977 shares issued and outstanding (aggregate liquidation preference of $3,671,825 in 1999)....................................... 3,671,825 Shareholders' equity (deficit): Series A Convertible Preferred Stock, $.01 par value; 2,054,000 shares authorized; 2,000,000 shares issued and outstanding (aggregate liquidation preference of $4,000,000)............................................ 20,000 Common Stock, no par value; 5,000,000 shares authorized; 1,054,499 shares issued................................ 216,900 Additional paid-in capital................................ 3,063,216 Notes receivable from shareholders........................ (159,391) Treasury Stock (47,797 shares of Common Stock), at cost... (13,120) Accumulated deficit....................................... (5,296,522) ----------- TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........................ (2,168,917) ----------- $ 6,393,025 ===========
See accompanying notes. F-14 191 GENETIC MICROSYSTEMS, INC. CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
FOR THE SIX MONTHS ENDED ----------------------------- JULY 3, 1999 JUNE 30, 1998 ------------ ------------- REVENUES Net product Sales......................................... $ 5,081,572 $ -- COSTS AND EXPENSES: Cost of sales............................................. 3,153,091 -- Research and development.................................. 1,381,309 1,070,532 Selling, general and administrative....................... 1,984,137 705,615 ----------- ----------- 6,518,537 1,776,147 ----------- ----------- LOSS FROM OPERATIONS........................................ (1,436,965) (1,776,147) OTHER INCOME (LOSS) Gain (loss) on sale of available for sale securities...... -- (664,505) Interest and dividend income, net......................... 64,387 17,975 ----------- ----------- 64,387 (646,530) ----------- ----------- LOSS BEFORE INCOME TAX BENEFIT.............................. (1,372,578) (2,422,677) INCOME TAX BENEFIT.......................................... -- 808,411 ----------- ----------- NET LOSS.................................................... (1,372,578) (1,614,266) CHANGE IN UNREALIZED LOSS ON AVAILABLE-FOR-SALE EQUITY SECURITIES................................................ -- 641,777 ----------- ----------- COMPREHENSIVE NET LOSS...................................... $(1,372,578) $ (972,489) =========== =========== LOSS PER SHARE NET LOSS PER SHARE -- BASIC AND DILUTED..................... $ (1.36) $ (10.35) =========== =========== COMPREHENSIVE NET LOSS PER SHARE -- BASIC AND DILUTED....... $ (1.36) $ (6.24) =========== =========== WEIGHTED AVERAGE COMMON SHARES -- BASIC AND DILUTED......... 1,009,499 155,901 =========== ===========
See accompanying notes. F-15 192 GENETIC MICROSYSTEMS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED ----------------------------- JULY 3, 1999 JUNE 30, 1998 ------------ ------------- OPERATING ACTIVITIES Net loss.................................................. $(1,372,578) $(1,614,266) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................... 106,685 24,840 Deferred taxes......................................... -- (808,411) Deferred rent.......................................... (11,430) -- Gain (loss) on sale of available for sale equity securities........................................... -- 664,505 Loss on the disposal of property and equipment......... 4,044 -- Provision for doubtful accounts........................ 75,603 -- Changes in operating assets and liabilities: Prepaid expenses and other assets...................... 16,795 (61,296) Accounts receivable.................................... (1,861,787) -- Inventories............................................ (577,552) -- Accounts payable and accrued expenses.................. 764,453 73,825 Deferred revenue....................................... 543,837 -- ----------- ----------- Net cash used in operating activities....................... (2,311,930) (1,720,803) INVESTING ACTIVITIES Purchase of property and equipment........................ (237,685) (282,958) Sale of available-for-sale equity securities.............. -- 2,673,223 ----------- ----------- Net cash (used in) provided by investing activities......... (237,685) 2,390,265 FINANCING ACTIVITIES Issuance of Series A and B Convertible Preferred Stock.... 709,184 957,212 Issuance of Common Stock.................................. 1,300 -- Purchase of Treasury Stock................................ (187) -- Collection of notes receivable............................ 449 -- Due to shareholder........................................ -- (120,000) ----------- ----------- Net cash provided by financing activities................... 710,746 837,212 ----------- ----------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (1,838,869) 1,506,674 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 4,365,446 33,654 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 2,526,577 $ 1,540,328 =========== ===========
See accompanying notes. F-16 193 GENETIC MICROSYSTEMS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS JULY 3, 1999 (UNAUDITED) 1. BASIS OF PRESENTATION THE COMPANY Genetic MicroSystems, Inc. (the "Company") was incorporated on August 7, 1997 to develop, manufacture and sell a new generation of enabling products for genomics research and drug discovery. The Company was a development-stage company until the commencement of substantial operations in 1998. The interim unaudited condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with generally accepted accounting principles. Accordingly, certain information and footnote disclosures normally included in annual financial statements have been omitted or condensed. In the opinion of management, all necessary adjustments (consisting of only normal recurring accruals) have been made to provide a fair presentation. The operating results for the six months ended July 3, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. Effective January 1, 1999, for quarterly interim reporting, the company adopted a fiscal quarter ending on the Saturday nearest to the end of the calendar quarter with the exception of year end, which ends on December 31. 2. INVENTORIES Inventories at July 3, 1999 consist of the following at: Purchased components........................................ $640,128 Units in process............................................ 209,300 Finished units.............................................. 34,945 Demonstration inventory..................................... 114,988 -------- $999,361 ========
3. INCOME TAXES Deferred income taxes consist of the following at July 3, 1999: Deferred tax asset: Net operating loss and tax credits carry-forwards......... $ 850,000 Start-up costs............................................ 480,000 ---------- 1,330,000 Valuation allowance....................................... 1,330,000 ---------- $ 0 ==========
The income tax benefit of $808,411 in 1998 represents the elimination of deferred tax liabilities recognized in connection with capital contributions, which are no longer payable due to the operating losses incurred by the Company in 1997 and 1998. At July 3, 1999, the Company had net operating loss carryforwards for income tax reporting purposes of approximately $1,400,000, to offset future F-17 194 GENETIC MICROSYSTEMS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) JULY 3, 1999 (UNAUDITED) federal taxable income which begin to expire in 2012. At July 3, 1999, the Company had tax credit carryforwards for income tax purposes of approximately $310,000 to offset future federal taxable income which begin to expire in 2012. A full valuation allowance has been established due to the uncertainty of the realization of these benefits in future years. In accordance with section 382 of Internal Revenue Code, the use of the above carry forward will be subject to annual limitations based upon ownership changes of the Company's stock which have occurred. 4. SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK The Company closed its second round of sales of the Series B Redeemable Convertible Preferred Stock in January 1999, selling an additional 84,845 shares for net proceeds of $721,186. Each share of Series B Redeemable Convertible Preferred Stock has the same number of common stock votes as its conversion rights provide, as defined in the amended Articles of Incorporation. Holders of Series B Redeemable Convertible Preferred Stock have preference over Series A Convertible Preferred Stock who have preference over common stock shareholders with respect to payment of dividends and distribution of assets in event of liquidation. Holders of Series A Convertible Preferred Stock are entitled to a liquidation value of $8.50 per share, respectively, plus all declared and unpaid dividends as of the liquidation date. Each share of Series B Redeemable Convertible Preferred Stock is convertible at any time into the number of shares of common stock which results from dividing the conversion price per share in effect at the time of conversion into $8.50 per share for each share of Series B Redeemable Convertible Preferred Stock being converted. Each share of Series B Redeemable Convertible Preferred Stock will automatically convert upon an initial public offering. The conversion price is subject to adjustment for, among other things, stock splits, dividends and recaptalizations, as defined in the Articles of Incorporation. The Company is required, at the option of the majority of Series B Redeemable Convertible Preferred Stock stockholders, to redeem one-third of the shares on December 30, 2004, 2005, and 2006, respectively, at $8.50 per share plus all declared and unpaid dividends. SERIES B PREFERRED STOCK WARRANTS The Company issued additional warrants to an employee to purchase 33,485 shares of Series B Preferred Stock at $8.50 per share which expire in 2008. No value has been assigned to these warrants. 5. SUBSEQUENT EVENTS: The Company has entered into an Agreement and Plan of Merger dated September 10, 1999 with Affymetrix Corporation of Santa Clara, California. The agreement is subject to the satisfaction of certain closing conditions, among which are a Hart-Scott-Rodino filing and an effective Form S-4 Registration Statement. F-18 195 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. As permitted by Section 102(b)(7) of the Delaware General Corporation Law, Affymetrix' charter includes a provision that eliminates the personal liability of a director to Affymetrix or its stockholders for monetary damages arising out of the director's breach of his or her fiduciary duty. The charter provides, however, that unless otherwise permitted by applicable law, a director remains potentially liable for monetary damages for: - breach of the director's duty of loyalty to Affymetrix or its stockholders; - acts or omissions not in good faith or which involve misconduct or a knowing violation of law; - an improper payment of a dividend or an improper redemption or repurchase of Affymetrix' stock (as provided in Section 174 of the Delaware General Corporation Law); or - any transaction from which a director derives an improper personal benefit. Any repeal or modification of this provision will not affect any right or protection of a director that exists at the time of such repeal or modification. Section 145 of the Delaware General Corporation Law empowers a Delaware corporation to indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation) by reason of the fact that such person is or was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such officer, director, employee or agent acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation's best interests, and, for criminal proceedings, had no reasonable cause to believe his or her conduct was unlawful. A Delaware corporation may indemnify officers and directors in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses which such officer or director actually and reasonably incurred. Article VIII of the bylaws of Affymetrix provides in terms similar to those of Section 145 of the Delaware General Corporation Law that Affymetrix has the power and is required to indemnify its directors and officers in accordance with Delaware Law. The right to indemnification includes the right to be paid by Affymetrix the expenses (including attorneys' fees) incurred in defending any suits brought in advance of their final disposition; provided, however, that if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by the indemnitee, including, without limitation, service to an employee benefit plan) will be made only upon delivery to Affymetrix of an undertaking, by or on behalf of the indemnitee, to repay all amounts so advanced if it will ultimately be determined by final judicial decision from which there is no further right to appeal. The rights to indemnification II-1 196 and to the advancement of expenses covered in Sections 1 and 2 of Article VII of Affymetrix' bylaws are contract rights and these rights continue as to an indemnitee who has ceased to be a director or officer and will inure to the benefit of his or her heirs, executors and administrators. If a claim covered by Affymetrix' bylaws (Article VIII, Sections 1 and 2) is not paid in full by Affymetrix within 60 days after a written claim has been received by Affymetrix, except in the case of advancement of expenses pursuant to the terms of an undertaking, in which case the applicable period is 20 days, an indemnitee will be entitled to be paid also the expense of prosecuting or defending the suit. The failure of the indemnitee to meet any applicable standard for indemnification set forth in the Delaware General Corporation Law: - is a defense in any suit brought by the indemnitee to enforce a right to indemnification (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses), and - entitles Affymetrix to recover an advancement of expenses pursuant to the terms of an undertaking upon a final adjudication in any suit brought by Affymetrix to recover an advancement of expenses pursuant to the terms of an undertaking. Neither the failure of Affymetrix, including its board of directors, independent legal counsel, or its stockholders, to have made a determination prior to the commencement of the suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by Affymetrix, including its board of directors, independent legal counsel, or its stockholders, that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, is a defense to the suit. In any suit brought by an indemnitee to enforce a right to indemnification or to an advancement of expenses, or brought by Affymetrix to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to an advancement of expenses under Article VIII of the bylaws or otherwise will be on Affymetrix. The rights to indemnification and to the advancement of expenses conferred in Affymetrix' bylaws are not exclusive of any other right which any person may have or acquire under Affymetrix' charter, any statute, agreement, vote of stockholders or disinterested directors or otherwise. Affymetrix may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of Affymetrix or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not Affymetrix would have the power to indemnify that person against the expense, liability, or loss under the Delaware General Corporation Law. Affymetrix may, to the extent authorized from time to time by the board of directors, grant rights to indemnification and to the advancement of expenses to any officer, employee or agent of Affymetrix to the fullest extent of the provisions allowed by its bylaws with respect to the indemnification and advancement of expenses of directors and officers of Affymetrix. II-2 197 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following Exhibits are filed herewith unless otherwise indicated:
EXHIBIT NO. DESCRIPTION - ------- ----------- 2.1 Agreement and Plan of Merger, dated as of September 10, 1999, among Affymetrix, Inc., GMS Acquisition, Inc., Genetic MicroSystems, Inc., Jean Montagu and the stockholders set forth on the signature pages thereto (attached as Appendix A to the Proxy Statement/ Prospectus contained in this Registration Statement). 3.1 Amended and Restated Certificate of Incorporation of Affymetrix, Inc. (incorporated by reference to Exhibit 3.1 of Affymetrix' Registration Statement on Form S-3 as filed July 12, 1999). 3.2 Bylaws of Affymetrix, Inc. (incorporated by reference to Appendix C of Affymetrix' Definitive Proxy Statement on Schedule 14A as filed on April 29, 1998). 4.1 Rights Agreement dated as of October 15, 1998 between Affymetrix, Inc. and America Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to Exhibit 1 of Affymetrix' Form 8-A as filed on October 16, 1998). 4.2 Indenture dated as of September 22, 1999, between Affymetrix, Inc. and The Bank of New York, as Trustee. 5.1 Opinion of Vern Norviel, Senior Vice President, General Counsel and Corporate Secretary of Affymetrix, Inc., regarding the validity of the shares of Affymetrix, Inc. Common Stock to be registered under this Registration Statement. 8.1 Opinion of Sullivan & Cromwell regarding certain United States federal income tax consequences of the Merger. 8.2 Opinion of Palmer & Dodge LLP regarding certain United States federal income tax consequences of the Merger. 10.1 Stock Option Agreement, dated as of September 10, 1999, between Affymetrix, Inc. and Genetic MicroSystems, Inc. (attached as Appendix B to the Proxy Statement/Prospectus contained in this Registration Statement). 23.1 Consent of Ernst & Young LLP, Independent Auditors (Boston, Massachusetts). 23.2 Consent of Ernst & Young LLP, Independent Auditors (Palo Alto, California). 23.3 Consent of Vern Norviel, Senior Vice President, General Counsel & Corporate Secretary (contained in Exhibit 5.1). 23.4 Consent of Sullivan & Cromwell (contained in Exhibit 8.1). 23.5 Consent of Palmer & Dodge LLP (contained in Exhibit 8.2). 24.1 Power of Attorney 99.1 Form of Proxy for holders of Genetic MicroSystems, Inc. Common Stock, Genetic MicroSystems, Inc. Series A Convertible Preferred Stock, and Series B Convertible Preferred Stock Genetic MicroSystems, Inc.
II-3 198
EXHIBIT NO. DESCRIPTION - ------- ----------- 99.2 Escrow Agreement, dated as of September 10, 1999, among Genetic MicroSystems, Inc., Affymetrix, Inc., GMS Acquisition, Inc., Jean Montagu, as Stockholder Representative, and Bank One Trust Company, N.A., as Escrow Agent (attached as Appendix C to the Proxy Statement/Prospectus contained in this Registration Statement). 99.3 Form of Stockholder Voting Agreement entered into by Affymetrix and Jean Montagu, Dominic Montagu, Sasha Montagu, Stanley Rose, Peter Honkanen and Myles L. Mace, Jr. (attached as Appendix D to the Proxy Statement/Prospectus contained in this Registration Statement).
(b) Financial Data Schedule. Schedules are omitted because they either are not required or are not applicable or because equivalent information has been included in the financial statements, the notes thereto or elsewhere herein. ITEM 22. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to II-4 199 Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) (1) The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by this form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of this form; and (2) the registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to this registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (d) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (e) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to items 4, 10(b), 11 or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (f) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this registration statement when it became effective. II-5 200 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Affymetrix, Inc. has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on October 14, 1999. AFFYMETRIX, INC. By: /s/ VERN NORVIEL ------------------------------------ Name: Vern Norviel Title: Senior Vice President, General Counsel & Corporate Secretary Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * Chief Executive Officer and October 14, 1999 - --------------------------------------------------- Chairman of the Board Stephen P.A. Fodor, Ph.D. * Vice President and Chief October 14, 1999 - --------------------------------------------------- Financial Officer (Principal Edward M. Hurwitz Financial and Accounting Officer) * Vice Chairman of the Board October 14, 1999 - --------------------------------------------------- John D. Diekman, Ph.D. * Director October 14, 1999 - --------------------------------------------------- Paul Berg, Ph.D. * Director October 14, 1999 - --------------------------------------------------- Vernon R. Loucks, Jr. * Director October 14, 1999 - --------------------------------------------------- Barry C. Ross, Ph.D. * Director October 14, 1999 - --------------------------------------------------- David B. Singer * Director October 14, 1999 - --------------------------------------------------- Lubert Stryer, M.D. * Director October 14, 1999 - --------------------------------------------------- John A. Young *By Power of Attorney /s/ VERN NORVIEL Attorney-in-Fact - --------------------------------------------------- Vern Norviel
II-6 201 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 2.1 Agreement and Plan of Merger, dated as of September 10, 1999, among Affymetrix, Inc., GMS Acquisition, Inc., Genetic MicroSystems, Inc., Jean Montagu and the stockholders set forth on the signature pages thereto (attached as Appendix A to the Proxy Statement/ Prospectus contained in this Registration Statement). 3.1 Amended and Restated Certificate of Incorporation of Affymetrix, Inc. (incorporated by reference to Appendix B of Affymetrix' Definitive Proxy Statement on Schedule 14A as filed April 29, 1998). 3.2 Bylaws of Affymetrix, Inc. (incorporated by reference to Appendix C of Affymetrix' Definitive Proxy Statement on Schedule 14A as filed on April 29, 1998). 4.1 Rights Agreement dated as of October 15, 1998 between Affymetrix, Inc. and America Stock Transfer & Trust Company, as Rights Agent (incorporated by reference to Exhibit 1 of Affymetrix' Form 8-A as filed on October 16, 1998). 4.2 Indenture dated as of September 22, 1999, between Affymetrix, Inc. and The Bank of New York, as Trustee. 5.1 Opinion of Vern Norviel, Senior Vice President, General Counsel and Corporate Secretary of Affymetrix, Inc., regarding the validity of the shares of Affymetrix, Inc. Common Stock to be registered under this Registration Statement. 8.1 Opinion of Sullivan & Cromwell regarding certain United States federal income tax consequences of the Merger. 8.2 Opinion of Palmer & Dodge LLP regarding certain United States federal income tax consequences of the Merger. 10.1 Stock Option Agreement, dated as of September 10, 1999, between Affymetrix, Inc. and Genetic MicroSystems, Inc. (attached as Appendix B to the Proxy Statement/Prospectus contained in this Registration Statement). 23.1 Consent of Ernst & Young LLP, Independent Auditors (Boston, Massachusetts). 23.2 Consent of Ernst & Young LLP, Independent Auditors (Palo Alto, California). Consent of Vern Norviel, Senior Vice President, General Counsel & 23.3 Consent of Vern Norviel, Senior Vice President, General Counsel and Corporate Secretary (contained in Exhibit 5.1). 23.4 Consent of Sullivan & Cromwell (contained in Exhibit 8.1). 23.5 Consent of Palmer & Dodge LLP (contained in Exhibit 8.2). 24.1 Power of Attorney 99.1 Form of Proxy for holders of Genetic MicroSystems, Inc. Common Stock, Genetic MicroSystems, Inc. Series A Convertible Preferred Stock, and Series B Convertible Preferred Stock Genetic MicroSystems, Inc.
202
EXHIBIT NO. DESCRIPTION - ------- ----------- 99.2 Escrow Agreement, dated as of September 10, 1999, among Genetic MicroSystems, Inc., Affymetrix, Inc., GMS Acquisition, Inc., Jean Montagu, as Stockholder Representative, and Bank One Trust Company, N.A., as Escrow Agent (attached as Appendix C to the Proxy Statement/Prospectus contained in this Registration Statement). 99.3 Form of Stockholder Voting Agreement entered into by Affymetrix and Jean Montagu, Dominic Montagu, Sasha Montagu, Stanley Rose, Peter Honkanen and Myles L. Mace, Jr. (attached as Appendix D to the Proxy Statement/Prospectus contained in this Registration Statement).
EX-4.2 2 INDENTURE 1 EXHIBIT 4.2 INDENTURE AFFYMETRIX, INC. to THE BANK OF NEW YORK Trustee 5% Convertible Subordinated Notes Due 2006 Dated as of September 22, 1999 2 Page Table of Contents Page ARTICLE I Definitions and Other Provisions of General Application SECTION 1.01. Definitions................................................................ 1 SECTION 1.02. Compliance Certificates and Opinions....................................... 8 SECTION 1.03. Form of Documents Delivered to Trustee..................................... 9 SECTION 1.04. Acts of Holders: Record Dates............................................. 9 SECTION 1.05. Notices, etc., to Trustee and Company...................................... 11 SECTION 1.06. Notices to Holders: Waiver................................................ 12 SECTION 1.07. Conflict with Trust Indenture Act.......................................... 12 SECTION 1.08. Effect of Headings and Table of Contents................................... 12 SECTION 1.09. Successors and Assigns..................................................... 12 SECTION 1.10. Severability Clause........................................................ 12 SECTION 1.11 Benefits of Indenture...................................................... 12 SECTION 1.12. Governing Law.............................................................. 13 SECTION 1.13. Legal Holidays............................................................. 13
ARTICLE II Security Forms SECTION 2.01. Forms Generally............................................................ 13 SECTION 2.02. Form of Face of Security................................................... 14 SECTION 2.03. Form of Reverse of Security................................................ 17 SECTION 2.04. Form of Trustee's Certificate of Authentication............................ 21 SECTION 2.05. Form of Conversion Notice.................................................. 21 SECTION 2.06. Form of Purchase Notice.................................................... 23 SECTION 2.07. Form of Certification...................................................... 23
ARTICLE III The Securities SECTION 3.01. Title and Terms............................................................ 24 SECTION 3.02. Denominations.............................................................. 25 SECTION 3.03. Execution, Authentication, Delivery and Dating............................. 25 SECTION 3.04. Global and Non-Global Securities........................................... 26 SECTION 3.05. Registration; Registration of Transfer and Exchange........................ 27 SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities........................... 30 SECTION 3.07. Payment of Interest; Interest Rights Preserved............................. 31 SECTION 3.08. Persons Deemed Owners...................................................... 32 SECTION 3.09. Cancellation............................................................... 33 SECTION 3.10. Computation of Interest.................................................... 33 SECTION 3.11. CUSIP Numbers.............................................................. 33
-ii- 3 Page ARTICLE IV Satisfaction and Discharge SECTION 4.01. Satisfaction and Discharge of Indenture.................................... 33 SECTION 4.02. Application of Trust Money................................................. 34
ARTICLE V Remedies SECTION 5.01. Events of Default.......................................................... 35 SECTION 5.02. Acceleration of Maturity; Rescission and Annulment......................... 36 SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee............................................ 37 SECTION 5.04. Trustee May File Proofs of Claim........................................... 38 SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities......................................... 38 SECTION 5.06. Application of Money Collected............................................. 38 SECTION 5.07. Limitation on Suits........................................................ 39 SECTION 5.08. Unconditional Right of Holders to Receive Principal, Premium and Interest and To Convert................ 39 SECTION 5.09. Restoration of Rights and Remedies......................................... 40 SECTION 5.10. Rights and Remedies Cumulative............................................. 40 SECTION 5.11. Delay or Omission Not Waiver............................................... 40 SECTION 5.12. Control by Holders......................................................... 40 SECTION 5.13. Waiver of Past Defaults.................................................... 40 SECTION 5.14. Undertaking for Costs...................................................... 41 SECTION 5.15. Waiver of Usury, Stay or Extension Laws.................................... 41
ARTICLE VI The Trustee SECTION 6.01. Certain Duties and Responsibilities........................................ 41 SECTION 6.02. Notice of Defaults......................................................... 42 SECTION 6.03. Certain Rights of Trustee.................................................. 42 SECTION 6.04. Not Responsible for Recitals or Issuance of Securities..................... 43 SECTION 6.05. May Hold Securities........................................................ 44 SECTION 6.06. Money Held in Trust........................................................ 44 SECTION 6.07. Compensation and Reimbursement............................................. 44 SECTION 6.08. Disqualification; Conflicting Interests.................................... 44 SECTION 6.09. Corporate Trustee Required; Eligibility.................................... 45 SECTION 6.10. Resignation and Removal; Appointment of Successor.......................... 45 SECTION 6.11. Acceptance of Appointment by Successor..................................... 46 SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business........................................... 46 SECTION 6.13. Preferential Collection of Claims Against Company.......................... 47
-iii- 4
Page SECTION 6.14. Appointment of Authenticating Agent........................................ 47 SECTION 6.15. Appointment of Co-Trustee.................................................. 48
ARTICLE VII Holders' Lists and Reports by Trustee and Company SECTION 7.01. Company to Furnish Trustee Names and Addresses to Holders............................................ 49 SECTION 7.02. Preservation of Information; Communications to Holders..................... 49 SECTION 7.03. Reports by Trustee......................................................... 49 SECTION 7.04. Reports by Company......................................................... 50
ARTICLE VIII Consolidation, Merger, Conveyance, Transfer or Lease SECTION 8.01. Company May Consolidate, etc., Only on Certain Terms....................... 50 SECTION 8.02. Successor Substituted...................................................... 51
ARTICLE IX Supplemental Indentures SECTION 9.01. Supplemental Indentures Without Consent of Holders......................... 51 SECTION 9.02. Supplemental Indentures with Consent of Holders............................ 52 SECTION 9.03. Execution of Supplemental Indentures....................................... 53 SECTION 9.04. Effect of Supplemental Indentures.......................................... 53 SECTION 9.05. Conformity with Trust Indenture Act........................................ 53 SECTION 9.06. Reference in Securities to Supplemental Indentures......................... 53
ARTICLE X Covenants SECTION 10.01. Payment of Principal, Premium and Interest................................. 53 SECTION 10.02. Maintenance of Office or Agency............................................ 54 SECTION 10.03. Money for Security Payments To Be Held in Trust............................ 54 SECTION 10.04. Statement by Officers as to Default........................................ 55 SECTION 10.05. Existence.................................................................. 55 SECTION 10.06. Maintenance of Properties.................................................. 56 SECTION 10.07. Payment of Taxes and Other Claims.......................................... 56 SECTION 10.08. Waiver of Certain Covenants................................................ 56 SECTION 10.09. Delivery of Certain Information............................................ 56 SECTION 10.10. Resale of Certain Securities; Reporting Issuer............................. 56 SECTION 10.11. Registration Rights........................................................ 57
-iv- 5 Page ARTICLE XI Redemption of Securities SECTION 11.01. Rights of Redemption....................................................... 58 SECTION 11.02. Applicability of Article................................................... 58 SECTION 11.03. Election to Redeem; Notice to Trustee...................................... 58 SECTION 11.04. Selection by Trustee of Securities to Be Redeemed......................... 58 SECTION 11.05. Notice of Redemption....................................................... 59 SECTION 11.06. Deposit of Redemption Price............................................... 59 SECTION 11.07. Securities Payable on Redemption Date...................................... 60 SECTION 11.08. Securities Redeemed in Part................................................ 60 SECTION 11.09. Conversion Arrangement on Call for Redemption.............................. 60
ARTICLE XII Subordination of Securities SECTION 12.01. Securities Subordinate to Senior Indebtedness.............................. 61 SECTION 12.02. Payment over of Proceeds upon Dissolution, Etc............................. 61 SECTION 12.03. No Payment When Senior Indebtedness in Default............................. 62 SECTION 12.04. Payment Permitted If No Default............................................ 63 SECTION 12.05. Subrogation to Rights of Holders of Senior Indebtedness.................... 63 SECTION 12.06. Provisions Solely to Define Relative Rights................................ 63 SECTION 12.07. Trustee to Effectuate Subordination........................................ 64 SECTION 12.08. No Waiver of Subordination Provisions...................................... 64 SECTION 12.09. Notice to Trustee.......................................................... 64 SECTION 12.10. Reliance on Judicial Order or Certificate of Liquidating Agent................................................................... 65 SECTION 12.11. Trustee Not Fiduciary for Holders of Senior Indebtedness................... 65 SECTION 12.12. Rights of Trustee as Holder of Senior Indebtedness; Preservation of Trustee's Rights........................................ 66 SECTION 12.13. Article Applicable to Paying Agents........................................ 66 SECTION 12.14. Certain Conversions Deemed Payment......................................... 66
ARTICLE XIII Conversion of Securities SECTION 13.01. Conversion Privilege and Conversion Price.................................. 66 SECTION 13.02. Exercise of Conversion Privilege........................................... 67 SECTION 13.03. Fractions of Shares........................................................ 68 SECTION 13.04. Adjustment of Conversion Price............................................. 69 SECTION 13.05. Notice of Adjustments of Conversion Price.................................. 74 SECTION 13.06. Notice of Certain Corporate Action......................................... 74 SECTION 13.07. Company to Reserve Common Stock............................................ 75 SECTION 13.08. Taxes on Conversions....................................................... 75
-v- 6
Page SECTION 13.09. Covenant as to Common Stock................................................ 75 SECTION 13.10. Cancellation of Converted Securities....................................... 75 SECTION 13.11. Provisions in Case of Reclassification, Consolidation, Merger or Sale of Assets.................................. 75 SECTION 13.12. Trustee Adjustment Disclaimer.............................................. 76
ARTICLE XIV Right to Require Purchase SECTION 14.01. Right to Require Purchase.................................................. 76 SECTION 14.02. Conditions and Procedures Relating to the Company's Election to Pay the Purchase Price in Common Stock....................... 76 SECTION 14.03. Notice, Method of Exercising Purchase Right................................ 78 SECTION 14.04. Deposit of Purchase Price.................................................. 79 SECTION 14.05. Securities Not Purchased in Part........................................... 79 SECTION 14.06. Securities Purchased in Part............................................... 79 SECTION 14.07. Certain Definitions........................................................ 79
ARTICLE XV Defeasance and Covenant Defeasance SECTION 15.01. Company's Option to Effect Defeasance or Covenant Defeasance......................................... 81 SECTION 15.02. Defeasance and Discharge................................................... 81 SECTION 15.03. Covenant Defeasance........................................................ 81 SECTION 15.04. Conditions to Defeasance or Covenant Defeasance............................ 81 SECTION 15.05. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions...... 83 SECTION 15.06. Reinstatement.............................................................. 84
ARTICLE XVI Immunity SECTION 16.01. Personal Immunity of Incorporators, Shareholders, Directors and Officers............................................................. 84
-vi- 7 INDENTURE dated as of September 22, 1999, between AFFYMETRIX, INC., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 3380 Central Expressway, Santa Clara, California 95051, and THE BANK OF NEW YORK, as Trustee (herein called the "Trustee"). The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of its 5% Convertible Subordinated Notes due 2006 (herein called the "Securities"), to be issued as in this Indenture provided. All things necessary to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done. W I T N E S S E T H : For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities or of any series thereof, as follows: ARTICLE I Definitions and Other Provisions of General Application SECTION 1.01. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: 1. The terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular. 2. All other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein. 3. All accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation. 4. Unless the context otherwise requires, any reference to an "Article" or a "Section" refers to an Article or Section, as the case may be, of this Indenture. 5. The words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms used in Article XIV have the meanings specified therein. 8 2 "Act", when used with respect to any Holder, has the meaning specified in Section 1.04. "Additional Interest" has the meaning specified in Section 10.11. "Affiliate" of any specified Person means any other Person who directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Member" means any member of, or participant in, the Depositary. "Applicable Procedures" means, with respect to any transfer or transaction involving a Global Security or beneficial interest therein, the rules and procedures of the Depositary for such Security, in each case to the extent applicable to such transaction and as in effect from time to time. "Authenticating Agent" means any Person authorized by the Trustee pursuant to Section 6.14 to act on behalf of the Trustee to authenticate Securities. "Beneficial Owner" has the meaning specified in Section 14.07. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means a day on which banking institutions are open for business and carrying out transactions in Dollars at the relevant place of payment. "Change in Control" has the meaning specified in Section 14.07. "Closing Price" on any Trading Day with respect to the per share price of Common Stock means the last reported sales price regular way or, in case no such reported sale takes place on such Trading Day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if not listed or admitted to trading on any national securities exchange, on Nasdaq or, if the Common Stock is not listed or admitted to trading on any national securities exchange or Nasdaq, the average of the closing bid and asked prices in the over-the-counter market as furnished by any New York Stock Exchange member firm that is selected from time to time by the Company for that purpose and is reasonably acceptable to the Trustee. 9 3 "Commencement Date" has the meaning specified in Section 13.04. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Stock" includes any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which is not subject to redemption by the Company. However, subject to the provisions of Section 13.11, shares issuable on conversion of Securities shall include only shares of the class designated as Common Stock of the Company at the date of this instrument or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which are not subject to redemption by the Company; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Order" has the meaning specified in the definition of Company Request in this Section 1.01. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Corporate Trust Office" means the principal office of the Trustee in the city at which at any particular time its corporate trust business shall be administered. As of the date hereof, the Corporate Trust Office of the Trustee is located at 101 Barclay Street, Floor 21 West, New York, New York 10286. "Corporation" means a corporation, association, company, joint-stock company or business trust. "Current Event" has the meaning specified in Section 13.04. "Defaulted Interest" has the meaning specified in Section 3.07. "Depositary" means, with respect to the Securities issued in whole or in part in the form of one or more Global Securities, a clearing agency registered under the 10 4 Exchange Act that is designated to act as Depositary for such Securities as contemplated by Section 2.01 (or any successor securities clearing agency so registered). "Distribution Date" has the meaning specified in Section 13.04. "Dollar" or "U.S.$" means a Dollar or other equivalent unit in such coin or currency of the United States as at the time shall be legal tender for the payment of public and private debts. "DTC" means The Depository Trust Company, a New York corporation. "Event of Default" has the meaning specified in Section 5.01. "ex date" has the meaning specified in Section 13.04. "Exchange Act" means the Securities Exchange Act of 1934 as it may be amended from time to time, and any successor act thereto, and the rules and regulations of the Commission promulgated thereunder. "Expiration Date" has the meaning specified in Section 1.04. "Expiration Time" has the meaning specified in Section 13.04. "Global Security" means a Security that is registered in the Security Register in the name of a Depositary or a nominee thereof. "Group" has the meaning specified in Section 14.07. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. "Initial Purchasers" means Credit Suisse First Boston Corporation, BancBoston Robertson Stephens Inc., ING Barings LLC, Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Issue Date" means the date of first issuance of the Securities under this Indenture. "junior securities" has the meaning specified in Section 12.14. 11 5 "Maturity", when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption, exercise of the purchase right or otherwise. "Nasdaq" means Nasdaq Stock Market, Inc. "Notice of Default" means a written notice of the kind specified in Section 5.01(4) or 5.01(5). "Officers' Certificate" means a certificate signed by any of the Chairman of the Board, a Vice Chairman of the Board, the Chief Executive Officer, the President or a Vice President, and by any of the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 10.04 shall be the principal executive, financial or accounting officer of the Company. "Opinion of Counsel" means a written opinion of counsel, who may be internal counsel for the Company. "Other Event" has the meaning specified in Section 13.04. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and separated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption shall have been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee shall have been made; (iii) Securities which have been paid pursuant to Section 3.07 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; and (iv) Securities which have been defeased pursuant to Section 15.02; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given, made or taken any request, demand, authorization, direction, notice, consent, waiver or other action hereunder as of any date, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to 12 6 be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver or other action, only Securities which a Responsible Officer of the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of (and premium, if any) or interest on any Securities on behalf of the Company. "Person" means any individual, corporation, limited liability company, partnership, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.06 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Purchase Date" has the meaning specified in Section 14.01. "Purchase Price" has the meaning specified in Section 14.01. "Purchased Shares" has the meaning specified in Section 13.04. "Qualified Institutional Buyer" means a "qualified institutional buyer" as defined in Rule 144A. "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed as set forth in the Securities. "Reference Date" has the meaning specified in Section 13.04. "Registration Default" has the meaning specified in Section 10.11. "Registration Rights Agreement" has the meaning specified in Section 10.11. "Regular Record Date" for the interest payable on any Interest Payment Date means the September 15 or March 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Responsible Officer", when used with respect to the Trustee, means any officer in the corporate trust department of the Trustee, including any vice president, 13 7 assistant vice president, assistant secretary, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such person's knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture. "Restricted Global Security" has the meaning specified in Section 2.01. "Restricted Security" means a Security required to bear the restricted securities legend set forth in Section 2.02. "Rule 144A" means Rule 144A under the Securities Act (or any successor provision), as it may be amended from time to time. "Rule 144A Information" has the meaning specified in Section 10.09. "Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture and "Security" means one of such Securities. "Securities Act" means the Securities Act of 1933 as it may be amended from time to time, and any successor act thereto, and the rules and regulations of the Commission promulgated thereunder. "Security Register" has the meaning specified in Section 3.05. "Security Registrar" has the meaning specified in Section 3.05. "Senior Indebtedness" means the principal of and premium, if any, and interest on all indebtedness of the Company for money borrowed, other than the Securities, whether outstanding on the date of execution of the Indenture or thereafter created, incurred, guaranteed or assumed, except such indebtedness that by the terms of the instrument or instruments by which such indebtedness was created or incurred expressly provides that it (i) is junior in right of payment to the Securities or (ii) ranks pari passu in right of payment to the Securities. The term "indebtedness for money borrowed" when used with respect to the Company is defined to mean (i) any obligation of, or any obligation guaranteed by, the Company for the repayment of borrowed money, whether or not evidenced by bonds, debentures, notes or other written instruments, (ii) all obligations of the Company with respect to interest rate hedging agreements to hedge interest rates, (iii) any deferred payment obligation of, or any such obligation guaranteed by, the Company for the payment of the purchase price of property or assets evidenced by a note or similar instrument, and (iv) any obligation of, or any such obligation guaranteed by, the Company for the payment of rent or other amounts under a lease of property or assets which obligation is required to be classified and accounted for as a capitalized lease on the balance sheet of the Company under generally accepted accounting principles. "Shelf Registration Statement" has the meaning specified in Section 10.11. 14 8 "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.07. "Stated Maturity", when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable. "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Surrendered Securities" has the meaning specified in Section 2.07. "Trading Day" means each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are not traded on the applicable securities exchange or in the applicable securities market. "Transfer Restricted Securities" has the meaning specified in the Registration Rights Agreement. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed and the rules and regulations thereunder; provided, however, that in the event the Trust Indenture Act of 1939 or such rules and regulations are amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 and such rules and regulations as so amended. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "United States" means the United States of America (including the States thereof and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction. "U.S. Government Obligation" has the meaning specified in Section 15.04. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". SECTION 1.02. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be 15 9 given by counsel, stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (a) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 1.03. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 1.04. Acts of Holders; Record Dates. Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument 16 10 or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section 1.04. The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. The ownership of Securities shall be proved by the Security Register. Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. The Company may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given or taken by Holders of Securities; provided that the Company may not set a record date for, and the provisions of this paragraph shall not apply with respect to, the giving or making of any notice, declaration, request or direction referred to in the next paragraph. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to take the relevant action, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities on such record date; and provided further, that for the purpose of determining whether Holders of the requisite principal amount of such Securities have taken such action, no Security shall be deemed to have been Outstanding on such record date unless it is also Outstanding on the date such action is to become effective. Nothing in this paragraph shall prevent the Company from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and of no effect), nor shall anything in this paragraph be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Trustee in writing and to each Holder of Securities in the manner set forth in Section 1.06. 17 11 The Trustee may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to join in the giving or making of (i) any Notice of Default, (ii) any declaration of acceleration referred to in Section 5.02, (iii) any request to institute proceedings referred to in Section 5.07(2), or (iv) any direction referred to in Section 5.12. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities on such record date; and provided, further, that for the purpose of determining whether Holders of the requisite principal amount of such Securities have taken such action, no Security shall be deemed to have been Outstanding on such record date unless it is also Outstanding on the date such action is to become effective. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action (whereupon the record date previously set shall automatically and without any action by any Person be cancelled and of no effect), nor shall anything in this paragraph be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Trustee, at the Company's expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Company in writing and to each Holder of Securities in the manner set forth in Section 1.06. With respect to any record date set pursuant to this Section, the party hereto that sets such record date may designate any day as the "Expiration Date" and from time to time may change the Expiration Date to any earlier or later day; provided that no such change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each Holder of Securities in the manner set forth in Section 1.06, on or before the existing Expiration Date. Notwithstanding the foregoing, no Expiration Date shall be later than the 180th day after the applicable record date and, if an Expiration Date is not designated with respect to any record date set pursuant to this Section, the party hereto that set such record date shall be deemed to have designated the 180th day after such record date as the Expiration Date with respect thereto. Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents, each of which may do so pursuant to such appointment with regard to all or any part of such principal amount. SECTION 1.05. Notices, etc. to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficiently given if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Administration, or at any other address previously furnished in writing to the Company by the Trustee, or 18 12 (2) the Company by the Trustee or by any Holder shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company, addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. SECTION 1.06. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 1.07. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act which is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act which may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. To the extent a Security conflicts with a provision in the Indenture, the Indenture governs. SECTION 1.08. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 1.09. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 1.10. Severability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 1.11. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the holders of Senior Indebtedness and the Holders of Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture. 19 13 SECTION 1.12. Governing Law. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. SECTION 1. 13. Legal Holidays. In any case where any Interest Payment Date, Redemption Date, Purchase Date or Stated Maturity of any Security or the last date on which a Holder has the right to convert his Securities shall not be a Business Day then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal (and premium, if any) or conversion of the Securities need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date, Purchase Date or at the Stated Maturity, or on such last day for conversion; provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Purchase Date or Stated Maturity, as the case may be. ARTICLE II Security Forms SECTION 2.01. Forms Generally. The Securities, the conversion notice and the Trustee's certificates of authentication shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or Depositary therefor or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. The definitive Securities shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. In certain cases described elsewhere herein, the legends set forth in the first four paragraphs of Section 2.02 may be omitted from Securities issued hereunder. Upon their original issuance, Securities offered and sold as provided in the Purchase Agreement, shall be issued in the form of a single Global Security in definitive, fully registered form without interest coupons, substantially in the form of Security set forth in Sections 2.02 and 2.03, with such applicable legends as are provided for in Section 2.02, except as otherwise permitted herein. Such Global Security shall be registered in the name of DTC, as Depositary, or its nominee or successor, duly executed by the Company and authenticated by the Trustee as hereinafter provided, and deposited with the Trustee, as custodian for DTC, for credit by DTC to the respective accounts of beneficial owners of the Securities represented thereby (or such other accounts as they may direct). Such Global Security, together with its Successor Securities which are Global Securities, are collectively herein called the "Restricted Global Security". Except as provided in this Section 2.01 or Section 3.05, owners of beneficial interests in Global Securities will not be entitled to receive physical delivery of 20 14 certificated Securities. Upon transfer of definitive Securities to a Qualified Institutional Buyer, such definitive Securities will, unless the Restricted Global Security has previously been exchanged, be exchanged for an interest in the Restricted Global Security pursuant to the provisions of Section 3.05. Neither the Company nor the Trustee shall have any responsibility for any defect in the CUSIP number that appears on any Security, check, advice of payment or redemption or purchase notice, and any such document may contain a statement to the effect that CUSIP numbers have been assigned by an independent service for convenience of reference and that neither the Company nor the Trustee shall be liable for any inaccuracy in such numbers. SECTION 2.02. Form of Face of Security. [INCLUDE IF SECURITY IS A RESTRICTED SECURITY OR A DEFINITIVE SECURITY OTHER THAN A RESTRICTED GLOBAL SECURITY: THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR IN A TRANSACTION EXEMPT FROM, OR NOT SUBJECT TO, THE SECURITIES ACT. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY, AND THE COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF, MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) THIS SECURITY AND THE COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (III) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (III) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY AND ANY SHARES OF COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.] [INCLUDE IF SECURITY IS A RESTRICTED GLOBAL SECURITY: THE SECURITIES EVIDENCED BY THIS GLOBAL SECURITY (OR ITS PREDECESSOR) WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT 21 15 FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND SUCH SECURITIES AND THE COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR IN A TRANSACTION EXEMPT FROM, OR NOT SUBJECT TO, THE SECURITIES ACT. EACH PURCHASER OF ANY BENEFICIAL INTEREST IN THE SECURITIES IS HEREBY NOTIFIED THAT THE SELLER OF SUCH BENEFICIAL INTEREST MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. EACH BENEFICIAL OWNER OF AN INTEREST IN ANY OF THE SECURITIES EVIDENCED BY THIS GLOBAL SECURITY (INCLUDING ANY PARTICIPANT IN THE DEPOSITARY HOLDING THE GLOBAL SECURITY THAT IS SHOWN AS HOLDING SUCH AN INTEREST ON THE RECORDS OF SUCH DEPOSITARY AND EACH BENEFICIAL OWNER THAT HOLDS THROUGH SUCH PARTICIPANT) AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) ANY BENEFICIAL INTEREST IN THE SECURITIES AND THE COMMON STOCK ISSUABLE UPON THE CONVERSION THEREOF MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (I) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (III) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH OF CASES (I) THROUGH (III) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B) THE BENEFICIAL OWNER WILL, AND EACH SUBSEQUENT BENEFICIAL OWNER OF THIS SECURITY OR ANY SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF IS REQUIRED TO, NOTIFY ANY PURCHASER OF ANY BENEFICIAL INTEREST IN THE SECURITIES AND ANY SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.] [INCLUDE IF SECURITY IS A GLOBAL SECURITY: THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR 22 16 IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC, AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL BECAUSE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] Affymetrix, Inc. 5% Convertible Subordinated Notes due 2006 CUSIP No. [ ] No. ____ U. S. $ -------------- Affymetrix, Inc., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to ________, or registered assigns, the principal sum of United States Dollars (U.S.$________ ) on October 1, 2006 and to pay interest thereon from September 22, 1999, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually in arrears on October 1 and April 1 in each year, commencing April 1, 2000, at the rate of 5% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the September 15 or March 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of, premium, if any, and interest (including payment of any Additional Interest) on this Security will be made at the Corporate Trust Office, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts by a U.S. Dollar check drawn on an account maintained with a bank in the Borough of Manhattan, The City of New York; provided, however, that upon written application by the Holder to the Security Registrar setting forth wire instructions not later than 5 days prior to the relevant payment date (in 23 17 the case of payment of principal) or not later than the relevant Record Date (in the case of payment of interest), such Holder may receive payment by wire transfer of Dollars to a U.S. Dollar account maintained by the payee with a bank in the United States or in Europe and designated by the payee to the Security Registrar. [Include if a Global Security--All payments by the Company in respect of a Global Security shall be wire transfer.] Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. AFFYMETRIX, INC. By: _______________________________ Name: Title: SECTION 2.03. Form of Reverse of Security. This Security is one of a duly authorized issue of Securities of the Company designated as its 5% Convertible Subordinated Notes due 2006 (herein called the "Securities"), limited in aggregate principal amount to U.S.$150,000,000, issued and to be issued under an Indenture, dated as of September 22, 1999 (herein called the "Indenture"), between the Company and The Bank of New York, as Trustee for the Holders of Securities issued under said Indenture (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the holders of Senior Indebtedness and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. Subject to and upon compliance with the provisions of the Indenture, the Holder of this Security is entitled, at his option, at any time on or before the close of business on the Business Day immediately preceding October 1, 2006, or in case this Security or a portion hereof is called for redemption, then in respect of this Security or such portion hereof until and including, but (unless the Company defaults in making the payment due upon redemption or is otherwise due) not after, the close of business on the Business Day immediately preceding the Redemption Date or Purchase Date, as the case may be, to convert this Security (or any portion of the principal amount hereof which is U.S.$1,000 or an integral multiple thereof), at the principal amount hereof, or of such 24 18 portion, into fully paid and non-assessable shares of Common Stock of the Company at a conversion price equal to U.S.$123.00 aggregate principal amount of Securities for each share of Common Stock (or at the current adjusted conversion price if an adjustment has been made as provided in Article XIII of the Indenture) by surrender of this Security, duly endorsed or assigned to the Company or in blank, to the Company at its office or agency in the Borough of Manhattan, The City of New York, accompanied by the conversion notice hereon executed by the Holder hereof evidencing such Holder's election to convert this Security, or if less than the entire principal amount hereof is to be converted, the portion hereof to be converted, and, in case such surrender shall be made during the period from the close of business on any Regular Record Date to the opening of business on the corresponding Interest Payment Date (unless this Security or the portion hereof being converted has been called for redemption on a Redemption Date within such period between and including such Regular Record Date and such Interest Payment Date), also accompanied by payment in cash of an amount equal to the interest payable on such Interest Payment Date on the principal amount of this Security then being converted. Subject to the aforesaid requirement for payment of interest and, in the case of a conversion after the close of business on any Regular Record Date and on or before the corresponding Interest Payment Date, to the right of the Holder of this Security (or any Predecessor Security) of record at such Regular Record Date to receive an installment of interest (even if the Security has been called for redemption on a Redemption Date within such period), no payment or adjustment is to be made on conversion for interest accrued hereon or for dividends on the Common Stock issued on conversion. No fractions of shares or scrip representing fractions of shares will be issued on conversion, but instead of any fractional interest the Company shall pay a cash adjustment or round up to the next higher whole share as provided in Article XIII of the Indenture. The conversion price is subject to adjustment as provided in Article XIII of the Indenture. In addition, the Indenture provides that in case of certain reclassifications, consolidations, mergers, sales or transfers of assets or other transactions pursuant to which the Common Stock is converted into the right to receive other securities, cash or other property, the Indenture shall be amended automatically, without the consent of any Holders of Securities, so that this Security, if then outstanding, will be convertible thereafter, during the period this Security shall be convertible as specified above, only into the kind and amount of securities, cash and other property receivable upon the transaction by a holder of the number of shares of Common Stock into which this Security might have been converted immediately prior to such transaction. The Company will furnish to any Holder, upon request and without charge, copies of the Certificate of Incorporation and By-laws of the Company then in effect. Any such request may be addressed to the Company. The Securities are subject to redemption at the option of the Company upon not less than 30 days' or more than 60 days' notice by mail, as a whole or from time to time in part, at any time on or after October 7, 2002 through September 30, 2003 at 102.50% of the principal amount, and thereafter, at the following Redemption Prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning on October 1 of the years indicated, 25 19
Redemption Year Price 2003................................ 101.67% 2004................................ 100.83% 2005 and thereafter................. 100%
together in the case of any such redemption with accrued and unpaid interest to (but not including) the Redemption Date, but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture. In certain circumstances involving a Change in Control, each Holder shall have the right to require the Company to redeem all or part of its Securities at a purchase price equal to 100% of the principal amount thereof, together with accrued and unpaid interest through the Purchase Date. The Purchase Price is payable in cash or, at the Company's option but subject to the satisfaction of certain conditions set forth in the Indenture, in shares of Common Stock valued at 95% of the average Closing Prices of the Common Stock for the five Trading Days preceding and including the third Trading Day prior to the Purchase Date. The Securities do not have the benefit of any sinking fund. In the event of redemption, conversion or purchase of this Security in part only, a new Security or Securities for the unredeemed, unconverted or unpurchased portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. Subject to certain limitations in the Indenture, at any time when the Company is not subject to Section 13 or 15(d) of the United States Securities Exchange Act of 1934, as amended, upon the request of a Holder or the holder of shares of Common Stock issued upon conversion thereof, the Company will promptly furnish or cause to be furnished Rule 144A Information (as defined below) to such Holder or such holder of shares of Common Stock issued upon conversion, or to a prospective purchaser of any such security designated by any such Holder or holder of shares of Common Stock, as the case may be, to the extent required to permit compliance by such Holder or holder of shares of Common Stock with Rule 144A under the United States Securities Act of 1933 (the "Securities Act"), in connection with the resale of any such security. "Rule 144A Information" shall be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto). If this Security is a Transfer Restricted Security, then the Holder of this Security [IF THIS SECURITY IS A GLOBAL SECURITY, THEN INSERT- (including any Person that has a beneficial interest in this Security)] and the Common Stock issuable upon conversion thereof is entitled to the benefits of a Registration Rights Agreement, dated as of September 22, 1999 (the "Registration Rights Agreement") executed by the Company. If a Registration Default occurs (as defined in the Registration Rights Agreement and in the Indenture), Additional Interest will accrue on this Security from and including the day following such Registration Default to but excluding the day on 26 20 which such Registration Default has been cured. Additional Interest will be paid semi-annually in arrears, with the first semi-annual payment due on the first Interest Payment Date in respect of the Securities following the date on which such Additional Interest begins to accrue, and will accrue at a rate per annum equal to an additional one-half of one percent (0.50%) of the principal amount of the Securities. Whenever in this Security there is a reference, in any context, to the payment of the principal of, premium, if any, or interest on, or in respect of, any Security, such mention shall be deemed to include mention of the payment of Additional Interest payable as described in the preceding paragraph to the extent that, in such context, Additional Interest is, was or would be payable in respect of such Security and express mention of the payment of Additional Interest (if applicable) in any provisions of this Security shall not be construed as excluding Additional Interest in those provisions of this Security where such express mention is not made. The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his attorney-in-fact for any and all such purposes. If an Event of Default shall occur and be continuing, the principal of all the Securities may be declared due and payable in the manner and with the effect provided in Article V of the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities under the Indenture at any time by the Company and the Trustee with the written consent of the Holders of a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of a majority in aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be written, with a copy delivered to the Trustee, and shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on (including Additional Interest) this Security at the times, place and rate, and in the coin or currency, herein prescribed or to convert this Security as provided in the Indenture. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of 27 21 this Security for registration of transfer at the Corporate Trust Office duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities are issuable only in registered form without coupons in denominations of U.S.$1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not payment of or on this Security is overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. Interest on this Security shall be computed on the basis of a 360-day year of twelve 30-day months. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. SECTION 2.04. Form of Trustee's Certificate of Authentication. This is one of the Securities referred to in the within-mentioned Indenture. Dated: The Bank of New York, not in its individual capacity but solely as Trustee By ------------------------ Authorized Signatory SECTION 2.05. Form of Conversion Notice. CONVERSION NOTICE To: Affymetrix, Inc. 28 22 The undersigned Holder of this Security hereby irrevocably exercises the option to convert this Security, or the portion hereof (which is U.S.$1,000 or an integral multiple thereof) below designated, at any time following the date of original issuance thereof, into shares of Common Stock in accordance with the terms of the Indenture referred to in this Security, and directs that the shares issuable and deliverable upon conversion, together with any check in payment for a fractional share and any Security representing any unconverted principal amount hereof, be issued and delivered to the registered owner hereof unless a different name has been provided below. If shares or any portion of this Security not converted are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith a certificate in proper form certifying that the applicable restrictions on transfer have been complied with. Any amount required to be paid by the undersigned on account of interest accompanies this Security. The Applicant hereby agrees that, promptly after request of the Company, he or it will furnish such proof in support of this certification as the Company or the Security Registrar for the Common Stock may, from time to time, request. Dated: --------------------------- Signature* --------------------------- Signature Guaranty If shares or Securities are to be Principal amount to be converted registered in the name of a Person (if less than all): other than the Holder, please print $ ,000 such Person's name and address:*
- ---------------------------------- ------------------------------- Name Social Security or Taxpayer Identification Number - ---------------------------------- Street Address - ---------------------------------- City, State and Zip Code * Signature(s) must be guaranteed by an eligible guarantor institution (banks, stock brokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program) pursuant to Securities and Exchange Commission Rule 17Ad-15 if shares of Common Stock are to be delivered, or unconverted Securities are to be issued, other than to and in the name of the registered owner. 29 23 SECTION 2.06. Form of Purchase Notice. ELECTION OF HOLDER TO REQUIRE PURCHASE 1. Pursuant to Section 14.01 of the Indenture, the undersigned hereby elects to have this Security purchased by the Company. 2. The undersigned hereby directs the Trustee or the Company to pay it or ________________ an amount in cash, or, at the Company's election, Common Stock valued as set forth in the Indenture, equal to 100% of the principal amount to be purchased (as set forth below), plus interest accrued to the Purchase Date, as provided in the Indenture. Dated:________________________ ------------------------------ Signature ------------------------------ Signature Guaranteed Principal amount to be purchased (must be an integral multiple of U.S. $1,000): Remaining principal amount following such purchase: -------------------- NOTICE: The signature to the foregoing Election must correspond to the Name as written upon the face of this Security in every particular, without alteration or any change whatsoever. SECTION 2.07. Form of Certification. Whenever any certification is required to be given to evidence compliance with certain restrictions relating to transfers of Restricted Securities contemplated by Section 3.05(b)(iv), Section 3.05(c) or Section 13.02, such certification shall be provided substantially in the form of the following certificate, with only such changes as shall be approved by the Company and the Initial Purchasers, TRANSFER CERTIFICATE The undersigned Holder hereby certifies with respect to U.S.$ principal amount of the above-captioned securities presented or surrendered on the date hereof (the "Surrendered Securities") for registration of transfer, or for exchange or conversion where the securities issuable upon such exchange or conversion are to be registered in a name other than that of the undersigned Holder (each such transaction 30 24 being a "transfer"), that such transfer complies with the restrictive legend set forth on the face of the Surrendered Securities for the reason checked below: _______ The transfer of the Surrendered Securities complies with Rule 144 under the U.S. Securities Act of 1933 (the "Securities Act"); or _______ The transfer of the Surrendered Securities complies with Rule 144A under the Securities Act; or _______ The transfer of the Surrendered Securities is pursuant to an effective registration statement under the Securities Act, the prospectus delivery requirements under the Securities Act have been satisfied with respect to such transfer, the undersigned Holder is named as a "Selling Securityholder" in the prospectus relating to such registration statement, or in amendments or supplements thereto, and the aggregate principal amount of Surrendered Securities transferred are all or a portion of the securities listed in such prospectus opposite the undersigned's name. Dated: _________________________________* * To be dated the date of surrender. --------------------------- Signature (If the registered owner is a corporation, partnership or fiduciary, the title of the Person signing on behalf of such registered owner must be stated.) ARTICLE III The Securities SECTION 3.01. Title and Terms. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to U.S.$150,000,000, except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Sections 3.04, 3.05, 3.06, 9.06, 11.08, 13.02 or 14.06 and except for Securities which, pursuant to Section 3.03, are deemed never to have been authenticated and delivered hereunder. The Stated Maturity of the Securities shall be October 1, 2006, and they shall bear interest at the rate of 5% per annum, payable semi-annually on October 1 and April 1 of each year commencing on April 1, 2000, until the principal thereof is paid or made available for payment. Payment of the principal of, premium, if any, and interest (including payment of any Additional Interest) on this Security will be made at the Corporate Trust Office, in such coin or currency of the United States of America as at the time of payment 31 25 is legal tender for payment of public and private debts by a U.S. Dollar check drawn on an account maintained with a bank in the Borough of Manhattan, The City of New York; provided, however, that upon written application by the Holder to the Security Registrar setting forth wire instructions not later than 15 days prior to the relevant payment date (in the case of payment of principal) or not later than the relevant Record Date (in the case of payment of interest), such Holder may receive payment by wire transfer of Dollars to a U.S. Dollar account maintained by the payee with a bank in the United States or in Europe and designated by the payee to the Security Registrar. The Securities shall be redeemable by the Company as provided in Article XI. The Securities shall be subordinated in right of payment to the prior payment in full of Senior Indebtedness as provided in Article XII. The Securities shall be convertible as provided in Article XIII. The Securities shall be subject to purchase by the Company at the option of the Holder as provided in Article XIV. SECTION 3.02. Denominations. The Securities shall be issuable only in registered form without coupons and only in denominations of U.S.$1,000 and any integral multiple thereof. SECTION 3.03. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by any of its Chairman of the Board, its Vice Chairman of the Board, its President or one of its Vice Presidents. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities; and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities as in this Indenture provided and not otherwise. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. 32 26 The Trustee shall have the right to decline to authenticate and deliver any Securities under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken or if the Trustee in good faith shall determine that such action would expose the Trustee to personal liability to existing Holders. SECTION 3.04. Global and Non-Global Securities. (a) Global Securities. (i) Each Global Security authenticated under this Indenture shall be registered in the name of the Depositary designated by the Company for such Global Security or a nominee thereof and delivered to such Depositary or a nominee thereof or custodian therefor, and each such Global Security shall constitute a single Security for all purposes of this Indenture. (ii) Notwithstanding any other provision in this Indenture, no Global Security may be exchanged in whole or in part for Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Security or a nominee thereof unless (A) such Depositary (1) has notified the Company and the Trustee that it is unwilling or unable to continue as Depositary for such Global Security or (2) has ceased to be a clearing agency registered as such under the Exchange Act or announces an intention permanently to cease business or in fact does so, in each case unless a successor Depositary is appointed by the Company, (B) there shall have occurred and be continuing an Event of Default with respect to such Global Security, or (C) the Company in its discretion at any time determines not to have all the Securities represented by a Global Security. Any Global Security exchanged pursuant to clause (i) above shall be so exchanged in whole and not in part and any Global Security exchanged pursuant to clause (ii) or (iii) above may be exchanged in whole or from time to time in part as directed by the Depositary. Any Security issued in exchange for a Global Security or any portion thereof shall be a Global Security; provided that any such Security so issued that is registered in the name of a Person other than the Depositary or a nominee thereof shall not be a Global Security. (iii) If any Global Security is to be exchanged for other Securities or cancelled in whole, it shall be surrendered by or on behalf of the Depositary or its nominee to the Trustee, as Security Registrar, for exchange or cancellation as provided in this Article III. If any Global Security is to be exchanged for other Securities or cancelled in part, or if another Security is to be exchanged in whole or in part for a beneficial interest in any Global Security, in each case, as provided in Section 3.05, then either (i) such Global Security shall be so surrendered for exchange or cancellation as provided in this Article III or (ii) the principal amount thereof shall be reduced or increased by an amount equal to the portion thereof to be so exchanged or cancelled, or equal to the principal amount of such other Security to be so exchanged for a beneficial interest therein, as the case may be, by means of an appropriate adjustment made on the records of the Trustee, as Security Registrar, whereupon the Trustee, in accordance with the Applicable Procedures, shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender or adjustment of a Global Security, the Trustee shall, subject to Section 3.05(c) and as otherwise provided in this Article III, authenticate and deliver any Securities issuable in exchange for such Global Security (or any portion thereof) to or upon the order of, and registered in such names as may be directed by, the Depositary or its authorized representative. Upon the request of the Trustee in connection with the occurrence of any of the events specified in the preceding paragraph, the Company shall promptly make available to the Trustee a reasonable supply of Securities that are not in the form of Global Securities. The Trustee 33 27 shall be entitled to rely upon any order, direction or request of the Depositary or its authorized representative which is given or made pursuant to this Article III if such order, direction or request is given or made in accordance with the Applicable Procedures. (iv) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof, whether pursuant to this Article III or otherwise, shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depositary for such Global Security or a nominee thereof, in which case such Security shall be authenticated and delivered in definitive, fully registered form, without interest coupons. (v) The Depositary or its nominee, as registered owner of a Global Security, shall be the Holder of such Global Security for all purposes under the Indenture and the Securities, and owners of beneficial interests in a Global Security shall hold such interests pursuant to the Applicable Procedures. Accordingly, any such owner's beneficial interest in a Global Security will be shown only on, and the transfer of such interest shall be effected only through, records maintained by the Depositary or its nominee or its Agent Members and such owners of beneficial interests in a Global Security will not be considered the owners or holders thereof. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or such nominee, as the case may be, or impair, as between the Depositary, its Agent Members and any other person on whose behalf an Agent Member may act, the operation of customary practices of such Persons governing the exercise of the rights of a holder of any Security. SECTION 3.05. Registration; Registration of Transfer and Exchange. (a) The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 10.02 being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers and exchanges thereof. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers and exchanges thereof as herein provided. Upon surrender for registration of transfer or exchange of any Security at an office or agency of the Company designated pursuant to Section 10.02 for such purpose, accompanied by a written instrument of transfer or exchange in the form provided by the Company, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations and of a like aggregate principal amount. (b) Notwithstanding any other provisions of this Indenture or the Securities, transfers and exchanges of Securities and beneficial interests in a Global Security of the kinds specified in this Section 3.05(b) shall be made only in accordance with this Section 3.05(b). (i) Transfer of Global Security. Other than as set forth in Section 3.04(a), a Global Security may not be transferred, in whole or in part, to any Person other than the Depositary or a nominee thereof, and no such transfer to any such other Person may be registered; provided that this Section 3.05(b)(i) shall not prohibit any 34 28 transfer of a Security that is issued in exchange for a Global Security but is not itself a Global Security. No transfer of a Security to any Person shall be effective under this Indenture or the Securities unless and until such Security has been registered in the name of such Person. Nothing in this Section 3.05(b)(i) shall prohibit or render ineffective any transfer of a beneficial interest in a Global Security effected in accordance with the other provisions of this Section 3.05(b). (ii) Transfer of Beneficial Interests in the Global Security. Transfer of beneficial interests in the Global Security shall be effected through the Depositary, in accordance with this Indenture (including applicable restrictions on transfer set forth herein, if any) and the procedures of the Depositary therefor, if applicable. (iii) Other Exchanges. In the event that a Global Security or any portion thereof is exchanged for Securities other than Global Securities, such other Securities may in turn be exchanged (on transfer or otherwise) for Securities that are not Global Securities or for beneficial interests in a Global Security (if any is then outstanding) only in accordance with such procedures, which shall be substantially consistent with the provisions of this Section 3.05(b) (including the certification requirements set forth on the reverse of the Security intended to insure that transfers of beneficial interests in a Global Security comply with Rule 144A or Rule 144 under the Securities Act, as the case may be) and any Applicable Procedures, as may be from time to time adopted by the Company and the Trustee. (iv) Transfer and Exchange of Definitive Securities. When definitive Securities are presented to the Security Registrar with a request: (A) to register the transfer of such definitive Securities; or (B) to exchange such definitive Securities for an equal principal amount of definitive Securities of other authorized denominations, the Security Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the definitive Securities surrendered for transfer or exchange: (x) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Security Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and (y) are being transferred or exchanged pursuant to an effective registration statement under the Securities Act, pursuant to Section 3.05(b)(v), or pursuant to clause (1), (2) or (3) below, and are accompanied by the following additional information and documents, as applicable: (1) if such definitive Securities are being delivered to the Security Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect (in the form set forth in Section 2.07); or 35 29 (2) if such definitive Securities are being transferred to the Company, a certification to that effect (in the form set forth in Section 2.07); or (3) if such definitive Securities are being transferred pursuant to an exemption from registration in accordance with Rule 144, (i) a certification to that effect (in the form set forth in Section 2.07) and (ii) if the Company or Security Registrar so requests, an opinion of counsel or other evidence reasonably satisfactory to them as to the compliance with the restrictions set forth in the legend set forth in Section 2.02. (v) Restrictions on Transfer of a Definitive Security for a Beneficial Interest in a Global Security. A definitive Security may not be exchanged for a beneficial interest in a Global Security except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a definitive Security, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Trustee, together with: (A) certification in the form set forth on the reverse of the Security that such definitive Security is being transferred to a Qualified Institutional Buyer in accordance with Rule 144A; and (B) written instructions directing the Trustee to make, or to direct the Securities Registrar to make, an adjustment on its books and records with respect to such Global Security to reflect an increase in the aggregate principal amount of the Securities represented by the Global Security, such instructions to contain information regarding the Depositary account to be credited with such increase, then the Trustee shall cancel such definitive Security and cause, or direct the Securities Registrar to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Securities Registrar, the aggregate principal amount of Securities represented by the Global Security to be increased by the aggregate principal amount of the definitive Security to be exchanged and shall credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the Global Security equal to the principal amount of the definitive Security so cancelled. If no Global Securities are then outstanding, the Company shall issue and the Trustee shall authenticate, upon written order of the Company in the form of an Officers' Certificate, a new Global Security in the appropriate principal amount. (c) Subject to the succeeding paragraph, every Security shall be subject to the restrictions on transfer provided in the legends required by Section 2.02 to be applied to such Security. Whenever any Security is presented or surrendered for registration of transfer or for exchange for a Security registered in a name other than that of the Holder, such Security must be accompanied by a certificate in substantially the form set forth in Section 2.07, dated the date of such surrender and signed by the Holder of such Security, as to compliance with such restrictions on transfer. The Security Registrar shall not be 36 30 required to accept for such registration of transfer or exchange any Security not so accompanied by a properly completed certificate. (d) The restrictions imposed by the legend set forth in the first or fourth paragraph, as the case may be, of Section 2.02 upon the transferability of any Security shall cease and terminate when such Security has been sold pursuant to an effective registration statement under the Securities Act, transferred in compliance with Rule 144 under the Securities Act (or any successor provision thereto), or after the second anniversary of the original issuance date of the Security (or such earlier date after which the Security may be freely transferred without registration under the Securities Act or without being subject to transfer restrictions pursuant to the Securities Act, as may be provided in Rule 144(k) under the Securities Act (or any successor provision thereto) or otherwise). Any Security as to which such restrictions on transfer shall have expired in accordance with their terms or shall have terminated may, upon surrender of such Security for exchange to the Security Registrar in accordance with the provisions of this Section 3.05 (accompanied, in the event that such restrictions on transfer have terminated by reason of a transfer in compliance with Rule 144 or any successor provision, by an opinion of counsel having substantial experience in practice under the Securities Act and otherwise reasonably acceptable to the Company, addressed to the Company and in form acceptable to the Company, to the effect that the transfer of such Security has been made in compliance with Rule 144 or such successor provision), be exchanged for a new Security, of like tenor and aggregate principal amount, which shall not bear the restrictive legend set forth in the first paragraph of Section 2.02. The Company shall inform the Trustee of the effective date of any registration statement registering the Securities under the Securities Act. The Trustee shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the aforementioned opinion of counsel or notice of an effective registration statement. (e) As used in the preceding two paragraphs (c) and (d) of this Section 3.05, the term "transfer" encompasses any sale, pledge, transfer, hypothecation or other disposition of any Security. (f) No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 3.04, 9.06, 11.08, 13.02 or 14.06 not involving any transfer. (g) The Company shall not be required (i) to issue, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities selected for redemption under Section 11.04 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. 37 31 If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of written notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion, but subject to any conversion rights, may, instead of issuing a new Security, pay such Security. Upon the issuance, authentication and delivery by the Trustee of any new Security under this Section 3.06, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued, authenticated and delivered by the Trustee pursuant to this Section 3.06 in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 3.07. Payment of Interest; Interest Rights Preserved . Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for payment of such interest. If the Company shall be required by law to deduct any taxes from any sum of interest payable hereunder to a Holder, (i) the Company shall make such deductions and shall pay the full amount deducted to the relevant taxing authority in accordance with applicable law and (ii) the amount of such deduction shall be treated for purposes hereof as a payment of interest. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the 38 32 payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause (1) provided. Thereupon, the Trustee shall, on behalf of, and upon the instructions of, the Company, fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee, in the name and at the expense of the Company, shall forward a notice prepared by the Company of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date at the expense of the Company. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after written notice given by the Company to the Trustee of the proposed payment pursuant to this clause (2), such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. In the case of any Security which is converted after any Regular Record Date and on or prior to the corresponding Interest Payment Date, interest on such Security whose Stated Maturity is on such Interest Payment Date shall be deemed to continue to accrue and shall be payable on such Interest Payment Date notwithstanding such conversion and notwithstanding that such Security may have been called for redemption on a Redemption Date within such period, and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on such Regular Record Date. Except as otherwise expressly provided in the immediately preceding sentence, in the case of any Security which is converted, interest whose Stated Maturity is after the date of conversion of such Security shall not be payable. SECTION 3.08. Persons Deemed Owners . Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered in the Security Register as the owner of such Security for the purpose of receiving 39 33 payment of principal of, premium, if any, and (subject to Section 3.07) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 3.09. Cancellation . All Securities surrendered for payment, redemption, purchase, registration of transfer or exchange or conversion shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of as directed by a Company Order; provided however, the Trustee shall not be required to destroy such cancelled Securities.. SECTION 3.10. Computation of Interest . Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 3.11 CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the "CUSIP" numbers. ARTICLE IV Satisfaction and Discharge SECTION 4.01. Satisfaction and Discharge of Indenture . This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of conversion, registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.06 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.03) have been delivered to the Trustee for cancellation; 40 34 (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited irrevocably with the Trustee as trust funds in trust for the benefit of Holders of Outstanding Securities in an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with; and (4) no Event of Default which, with notice or lapse of time, or both, would become an Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.07, the obligations of the Company to any Authenticating Agent under Section 6.14 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 4.02 and the last paragraph of Section 10.03 shall survive. SECTION 4.02. Application of Trust Money . Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustee pursuant to Section 4.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee. All moneys deposited with the Trustee pursuant to Section 4.01 (and held by it or any Paying Agent) for the payment of Securities subsequently converted shall be returned to the Company upon Company Request. 41 35 ARTICLE V Remedies SECTION 5.01. Events of Default . "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article XII or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest (including Additional Interest) upon any Security when it becomes due and payable, and continuance of such default for a period of 30 days (whether or not such payment is prohibited by the provisions of Article XII); or (2) default in the payment of the principal of (or premium, if any, on) any Security at its Maturity (whether or not such payment is prohibited by the provisions of Article XII); or (3) failure by the Company to provide the notice of a Change in Control in accordance with Section 14.03 or default in the payment of the Purchase Price in respect of any Security on the Purchase Date therefor (whether or not such payment is prohibited by the provisions of Article XII); or (4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (5) a default under any bonds, debentures, notes or other evidences of indebtedness for money borrowed by the Company or a Subsidiary or under any mortgages, indentures or instruments under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company or a Subsidiary, whether such indebtedness now exists or shall hereafter be created which indebtedness, individually or in the aggregate, has a principal amount outstanding in excess of U.S.$10,000,000, which default shall constitute a failure to pay any portion of the principal of such indebtedness when due and payable after the expiration of any applicable grace or cure period with respect thereto or shall have resulted in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of 30 days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default and requiring the Company to cause such 42 36 indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; or (6) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company or a Subsidiary in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company or a Subsidiary bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or a Subsidiary under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or a Subsidiary or of any substantial part of their respective properties, or ordering the winding up or liquidation of the affairs of the Company or a Subsidiary, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (7) the commencement by the Company or a Subsidiary of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by either the Company or a Subsidiary to the entry of a decree or order for relief in respect of the Company or a Subsidiary in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against either the Company or a Subsidiary, or the filing by either the Company or a Subsidiary of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by either the Company or a Subsidiary to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or a Subsidiary or of any substantial part of their respective properties, or the making by either the Company or a Subsidiary of an assignment for the benefit of creditors, or the admission by either the Company or a Subsidiary in writing of an inability to pay the debts of either the Company or a Subsidiary generally as they become due, or the taking of corporate action by the Company or a Subsidiary in furtherance of any such action. SECTION 5.02. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 5.01(6) or 5.01(7)) occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities may declare the principal of all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal and any accrued interest (including Additional Interest) thereon shall become immediately due and payable. If an Event of Default specified in Section 5.01(6) or 5.01(7) occurs, the principal of, and accrued interest (including Additional Interest) on, all the Securities shall automatically, and without any declaration or other action on the part of the Trustee or any Holder, become immediately due and payable. At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the 43 37 Trustee as hereinafter in this Article V provided, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest (including Additional Interest) on all Securities, (B) the principal of (and premium, if any, on) any Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default, other than the nonpayment of the principal of Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee. If (1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount then due and payable on such Securities for principal (and premium, if any) and interest, and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any) and on any overdue interest, at the rate borne by the Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such 44 38 appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 5.04. Trustee May File Proofs of Claim. In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, (1) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (2) to collect and receive any moneys or other property payable or deliverable on any such claim and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided, however, that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors' or other similar committee. SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. SECTION 5.06. Application of Money Collected. Any money collected by the Trustee pursuant to this Article V shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on 45 39 account of principal (or premium, if any) or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: to the payment of all amounts due the Trustee under Section 6.07; SECOND: subject to Article XII, to the payment of the amounts then due and unpaid for first, interest (including Additional Interest) on, and, second, for principal of (and premium, if any, on) the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for interest and principal (and premium, if any) respectively; THIRD: the balance, if any, to the Person or Persons entitled thereto, as their interest may appear or as a court of competent jurisdiction shall direct; and FOURTH: to the Company. SECTION 5.07. Limitation on Suits. No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to a Responsible Officer the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee written indemnity satisfactory to it (which indemnity shall not be unreasonable) against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the fights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders. SECTION 5.08. Unconditional Right of Holders To Receive Principal, Premium and Interest and To Convert. Notwithstanding any other provision in this 46 40 Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Section 3.07) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption or purchase, on the Redemption Date or Purchase Date, as the case may be) and to convert such Security in accordance with Article XIII and to institute suit for the enforcement of any such payment and right to convert, and such rights shall not be impaired without the consent of such Holder. SECTION 5.09. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 5.10. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 3.06, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.11. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article V or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 5.12. Control by Holders. The Holders of a majority in principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; provided that the Trustee may seek the advice of counsel and (1) such direction shall not be in conflict with any rule of law or with this Indenture, and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 5.13. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default 47 41 (1) in the payment of the principal of (or premium, if any) or interest on any Security, or (2) in respect of a covenant or provision hereof which under Article IX cannot be modified or amended without the consent of the Holder of each Outstanding Security affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. A copy of such waiver shall be delivered by the Company to the Trustee. SECTION 5.14. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided, that this Section 5.14 shall not be deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Trustee or the Company or in any suit for the enforcement of the right to convert any Security in accordance with Article XIII. SECTION 5.15. Waiver of Usury, Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE VI The Trustee SECTION 6.01. Certain Duties and Responsibilities. (a) Except during the continuance of an Event of Default, (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether 48 42 or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein). (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that (1) this paragraph (c) shall not be construed to limit the effect of paragraph (a) of this Section; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (4) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers. (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee (as Trustee, Paying Agent, Authenticating Agent or Security Registrar) shall be subject to the provisions of this Section. SECTION 6.02. Notice of Defaults. Within 90 days after the occurrence of any default hereunder, the Trustee shall give the Holders, in the manner provided in Section 1.06, notice of any default hereunder actually known to a Responsible Officer of the Trustee; provided, however, that in the case of any default of the character specified in Section 5.01(3), no such notice to Holders shall be given until at least 30 days after the occurrence thereof. The Trustee shall not be deemed to have notice of a default unless (i) the Trustee has received written notice thereof from the Company or any Holder or (ii) a Responsible Officer of the Trustee shall have actual knowledge thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. SECTION 6.03. Certain Rights of Trustee. Subject to the provisions of Section 6.01: (a) the Trustee may conclusively rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, 49 43 opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors shall be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may require and, in the absence of bad faith on its part, conclusively rely upon an Opinion of Counsel and Officers' Certificate; (d) the Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity satisfactory to the Trustee (which security or indemnity shall not be unreasonable) against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney at the Company's expense; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (h) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers. SECTION 6.04. Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. Neither the Trustee nor any Authenticating Agent shall be accountable for the use or application by the Company of Securities or the proceeds thereof. 50 44 SECTION 6.05. May Hold Securities. The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Section 6.08 and Section 6.13, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent. SECTION 6.06. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company in writing. SECTION 6.07. Compensation and Reimbursement. The Company agrees: (1) to pay to the Trustee from time to time such compensation as shall be agreed in writing between the Company and the Trustee for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or willful misconduct; (3) to indemnify each of the Trustee and any predecessor Trustee for, and to hold each harmless against, any loss, liability or expense incurred without negligence or willful misconduct on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim (whether asserted by the Company, a Holder of Securities or any other Person) or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Trustee shall notify the Company of any claim asserted against it for which it may seek indemnity; (4) all indemnifications and releases from liability granted hereunder to the Trustee shall extend to its officers, directors, employees, agents, successors and assigns; (5) when the Trustee incurs expenses or renders services after the occurrence of any Event of Default specified in Section 5.01, the expenses and the compensation for the services are intended to constitute expenses of administration under any bankruptcy, insolvency or similar laws; and (6) the obligations of the Company under this Section shall survive the satisfaction and discharge of this Indenture. SECTION 6.08. Disqualification; Conflicting Interests. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the 51 45 Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. SECTION 6.09. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States, authorized under such laws to exercise corporate trust powers, which shall have (or, in the case of a corporation included in a bank holding company system, the related bank holding company shall have) a combined capital and surplus of at least U.S.$50,000,000, subject to supervision or examination by Federal or State authority, in good standing and having an established place of business or agency in the Borough of Manhattan, The City of New York. If such corporation or related bank holding company publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation or related bank holding company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article VI. SECTION 6.10. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 6.11. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 6.11 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. If the instrument of acceptance by a successor Trustee required by Section 6.11 shall not have been delivered to the Trustee within 30 days after the giving of such notice of removal, the removed Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (d) If at any time: (1) the Trustee shall fail to comply with Section 6.08 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 6.09 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, 52 46 then, in any such case, (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 5.14, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 6.11, become the successor Trustee and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 6.11, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to all Holders in the manner provided in Section 1.06. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 6.11. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article VI. SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder; provided such corporation shall be otherwise qualified and eligible under this Article VI without the execution or filing of any paper or any further act on the 53 47 part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 6.13. Preferential Collection of Claims Against Company. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). SECTION 6.14. Appointment of Authenticating Agent. The Trustee may appoint an Authenticating Agent or Agents which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon original issue and upon exchange, registration of transfer, partial conversion, partial redemption, or partial purchase or pursuant to Section 3.06, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States, authorized under such laws to act as Authenticating Agent, which shall have (or, in the case of a corporation included in a bank holding company system, the related bank holding company shall have) a combined capital and surplus of not less than U.S.$50,000,000 and be subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then, for the purposes of this Section, the combined capital and surplus of such Authenticating Agent or related bank holding company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent; provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.14, the Trustee may 54 48 appoint a successor Authenticating Agent which shall be acceptable to the Company and shall mail written notice of such appointment by first-class mail, postage prepaid, to all Holders as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section 6.14. The Company agrees to pay to each Authenticating Agent from time to time compensation for its services under this Section 6.14. If an appointment is made pursuant to this Section, the Securities may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternative certificate of authentication in the following form: This is one of the Securities described in the within-mentioned Indenture. The Bank of New York Dated: __________ ______________________________ As Trustee By ______________________________ As Authenticating Agent By______________________________ Authorized Signatory SECTION 6.15. Appointment of Co-Trustee. Subject to the qualifications set forth in Section 6.09, the Trustee may appoint an additional institution as a separate trustee or co-trustee. If the Trustee appoints an additional institution as a separate trustee or co-trustee, each and every remedy, power, fight, claim, demand, cause of action, immunity, estate, duty, obligation, title, interest and lien expressed or intended by this Indenture to be exercised by, vested in and conveyed by the Trustee with respect thereto shall be exercisable by, vested in and conveyed to such separate trustee or co-trustee, but only to the extent necessary to enable such separate trustee or co-trustee to exercise such powers, rights and remedies, and every covenant and obligation necessary for the exercise thereby by such separate trustee or co-trustee shall run to and be enforceable by either of them. Should any instrument in writing from the Company be required by the separate trustee or co-trustee so appointed by the Trustee for more fully vesting in and confirming to them such properties, rights, powers, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Company. If any separate trustee or co-trustee, or a successor to either, shall become incapable of acting or not qualified to act, resign or be removed, all the estate, properties, rights, powers, trusts, duties and obligations of such separate trustee or co-trustee, so far as permitted by law, shall vest in and be exercised by the Trustee until the appointment of a successor to such separate trustee or co-trustee. The appointment of any separate trustee or co-trustee shall be subject to written approval of the Company so long as no Event of Default has occurred and is continuing under this Indenture. 55 49 ARTICLE VII Holders' Lists and Reports by Trustee and Company SECTION 7.01. Company To Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee (a) semi-annually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar. SECTION 7.02. Preservation of Information; Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.01 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.01 upon receipt of a new list so furnished. (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. SECTION 7.03. Reports by Trustee. (a) The Trustee shall transmit to Holders within 60 days after May 15th of each year such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Securities are listed, with the Commission, if applicable, and with the Company. The Company will promptly notify the Trustee when the Securities are listed on any stock exchange and of any delisting thereof. SECTION 7.04. Reports by Company. (a) The Company shall file with the Trustee and the Commission, if applicable, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; 56 50 provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. Delivery of such reports, information and documents to the Trustee is for informational purposes only, and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). Notwithstanding anything to the contrary contained herein, the Trustee shall have no duty to review such documents for the purpose of determining compliance with this Indenture. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers' Certificates). (b) The Company shall provide the Trustee with at least 30 days' prior written notice of any change in location of its principal executive offices or other principal place of business. ARTICLE VIII Consolidation, Merger, Conveyance, Transfer or Lease SECTION 8.01. Company May Consolidate, etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other Person or, directly or indirectly, convey, transfer, sell, lease or otherwise dispose of all or substantially all of its properties and assets to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or convey, transfer, sell, lease or otherwise dispose of all or substantially all of its properties and assets to the Company, unless: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety (i) shall be a corporation, partnership or trust, (ii) shall be an entity (A) organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia or (B) organized and validly existing under the laws of a jurisdiction outside of the United States of America, with its common stock, or American Depositary Shares representing such shares of common stock, traded on a national securities exchange in the United States of America or through Nasdaq and a worldwide total market capitalization of its equity securities of at least U.S. $5 billion, and (iii) shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest (including Additional Interest) on all the Securities and the performance or observance of every covenant of this Indenture on the part of the Company to be 57 51 performed or observed and shall have provided for conversion rights in accordance with Article XIII; (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Article VIII and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 8.02. Successor Substituted. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 8.01, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be released from its obligations and covenants under this Indenture and the Securities. ARTICLE IX Supplemental Indentures SECTION 9.01. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or (2) to add to the covenants of the Company for the equal and ratable benefit of the Holders, or to surrender any right or power herein conferred upon the Company; or (3) to secure the Company's obligations in respect of the Securities; or (4) to make provision with respect to the conversion rights of Holders pursuant to the requirements of Article XIII; or (5) to make any changes or modifications to this Indenture necessary in connection with the registration of any Transfer Restricted Securities under the 58 52 Securities Act as contemplated by Section 10.11; provided that such action pursuant to this clause (5) shall not adversely affect the interests of the Holders of Securities; or (6) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, to correct or supplement any provision herein which limits, qualifies or conflicts with a provision of the Trust Indenture Act which is required under such Act to be a part of and govern this Indenture, in any case to the extent necessary to qualify this Indenture under the Trust Indenture Act, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture; provided that such action pursuant to this clause (6) shall not adversely affect the interests or legal rights of the Holders in any material respect. SECTION 9.02. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities, by the Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) change the Stated Maturity of the principal of, or any installment of interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the place of payment where, or the coin or currency in which, any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption or purchase, on or after the Redemption Date or Purchase Date, as the case may be), or adversely affect the right to convert any Security as provided in Article XIII (except as permitted by Section 9.01(4)), or modify the provisions of this Indenture with respect to the subordination of the Securities in a manner adverse to the Holders, or modify the redemption provisions in a manner adverse to the Holders, or modify the provisions relating to the Company's requirement to offer to purchase Notes upon a Change in Control in a manner adverse to the Holders, or (2) modify any of the provisions of this Section 9.02, Section 5.13 or Section 10.08, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby, or (3) modify the obligation of the Company to maintain an office or agency in the Borough of Manhattan, The City of New York pursuant to Section 10.02, or (4) modify any of the provisions of Section 10.09 or Section 10.10, or (5) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental 59 53 indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture. It shall not be necessary for any Act of Holders under this Section 9.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 9.03. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article IX or the modifications thereby of the trusts created by this Indenture, the Trustee shall receive, and (subject to Section 6.01 and Section 6.03) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture, complies with its terms and will, upon the execution and delivery thereof, be valid and binding upon the Company in accordance with its terms. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.04. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 9.05. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act. SECTION 9.06. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the judgment of the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. ARTICLE X Covenants SECTION 10.01. Payment of Principal, Premium and Interest. The Company will duly and punctually pay the principal of (and premium, if any) and interest on the Securities in accordance with the terms of the Securities and this Indenture. SECTION 10.02. Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan, The City of New York an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange, where Securities may be surrendered for conversion and where notices and demands to or upon the Company in respect of the 60 54 Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee or the office or agency of the Trustee in the Borough of Manhattan, The City of New York, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside the Borough of Manhattan, The City of New York) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. SECTION 10.03. Money for Security Payments To Be Held in Trust. If the Company shall at any time act as its own Paying Agent, it will, prior to 11:00 a.m., New York City time, on each due date of the principal of (and premium, if any) or interest (together with any Additional Interest in respect thereof) on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest (together with any Additional Interest in respect thereof) so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents, it will, prior to each due date of the principal of (and premium, if any) or interest (together with any Additional Interest in respect thereof) on any Securities, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium, if any, or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee in writing of its action or failure so to act. The Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section 10.03, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of, premium, if any, or interest on Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee written notice of any default by the Company (or any other obligor upon the Securities) in the making of any payment of principal, premium, if any, or interest; and 61 55 (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest (together with any Additional Interest in respect thereof) on any Security and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 10.04. Statement by Officers as to Default. The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. SECTION 10.05. Existence. Subject to Article VIII, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 10.06. Maintenance of Properties. The Company shall cause all properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of 62 56 the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section 10.06 shall prevent the Company from discontinuing the operation or maintenance of any of such properties, or disposing of any of them, if such discontinuance or disposition is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Holders. SECTION 10.07. Payment of Taxes and Other Claims. The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 10.08. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 10.05 to 10.07, inclusive, if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. SECTION 10.09. Delivery of Certain Information. At any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act, upon the request of a Holder or the holder of shares of Common Stock issued upon conversion thereof, the Company shall promptly furnish or cause to be furnished Rule 144A Information (as defined below) to such Holder or such holder of shares of Common Stock issued upon conversion of Securities, or to a prospective purchaser of any such security designated by any such Holder or holder, as the case may be, to the extent required to permit compliance by such Holder or holder with Rule 144A under the Securities Act in connection with the resale of any such security. "Rule 144A Information" shall be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act. SECTION 10.10. Resale of Certain Securities; Reporting Issuer. During the period beginning on the last date of original issuance of the Securities and ending on the date that is two years from such date, the Company will not, and will use its best efforts not to permit any of its "affiliates" (as defined under Rule 144 under the Securities Act or any successor provision thereto) to, resell (x) any Securities which constitute "restricted securities" under Rule 144 or (y) any securities into which the Securities have been converted under this Indenture which constitute "restricted securities" under Rule 144, that in either case have been reacquired by any of them. The Trustee shall have no responsibility in respect of the Company's performance of its agreement in the preceding sentence. 63 57 SECTION 10.11. Registration Rights. (a) The Company agrees that the Holders (and any Person that has a beneficial interest in a Security) from time to time of Transfer Restricted Securities are entitled to the benefits of a Registration Rights Agreement, dated as of September 22, 1999 (the "Registration Rights Agreement"), executed by the Company. Pursuant to the Registration Rights Agreement, the Company has agreed for the benefit of the Holders from time to time of Transfer Restricted Securities, at the Company's expense, (i) to file within 90 days after the first date of original issuance of the Securities, a shelf registration statement (the "Shelf Registration Statement") with the Commission with respect to resales of the Transfer Restricted Securities, (ii) to use its commercially reasonable best efforts to cause such Shelf Registration Statement to be declared effective by the Commission not later than 150 days after the first date of original issuance of the Securities, and (iii) to use its commercially reasonable best efforts to maintain such Shelf Registration Statement continuously effective under the Securities Act subject to and in accordance with the terms of the Registration Rights Agreement. Additional interest (the "Additional Interest") with respect to the Securities shall be assessed as follows if any of the following events occur (each such event in clauses (i) through (iii) below being herein called a "Registration Default"): (i) if on or prior to the 90th day after the first date of original issuance of the Securities the Shelf Registration Statement has not been filed with the Commission; (ii) if on or prior to the 150th day after the first date of original issuance of the Securities the Shelf Registration Statement has not been declared effective by the Commission; or (iii) if after the Shelf Registration Statement is declared effective (A) the Shelf Registration Statement thereafter ceases to be effective; or (B) the Shelf Registration Statement or the related prospectus ceases to be usable subject to certain exceptions set forth in the Registration Rights Agreement, including the right to suspend the use of the Shelf Registration Statement under certain circumstances for up to 90 days) in connection with resales of Transfer Restricted Securities in accordance with and during the periods specified herein because either (1) any event occurs as a result of which the related prospectus forming part of such Shelf Registration Statement would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or (2) it shall be necessary to amend such Shelf Registration Statement or supplement the related prospectus, to comply with the Securities Act or the Exchange Act or the respective rules thereunder. Additional Interest shall accrue on the Securities over and above the interest set forth in the title of the Securities from and including the date on which any such Registration Default shall occur, to but excluding the date on which all such Registration Defaults have been cured, at a rate of 0.50% per annum. Written notice of any such Registration Default shall be provided to the Trustee by the Company. (b) Any amounts of Additional Interest due pursuant to clause (a)(i), (a)(ii) or (a)(iii) of this Section 10.11 shall be payable in cash on the regular Interest 64 58 Payment Dates in the manner provided for by the Indenture. The amount of Additional Interest shall be determined by multiplying the applicable Additional Interest rate by the principal amount of the Securities, multiplied by a fraction, the numerator of which is the number of days such Additional Interest rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months), and the denominator of which is 360. Whenever in this Indenture there is mentioned, in any context, the payment of the principal of, premium, if any, or interest on, or in respect of, any Security, such mention shall be deemed to include mention of the payment of Additional Interest provided for in this Section to the extent that, in such context, Additional Interest are, were or would be payable in respect thereof pursuant to the provisions of this Section 10.11 and express mention of the payment of Additional Interest (if applicable) in any provisions hereof shall not be construed as excluding Additional Interest in those provisions hereof where such express mention is not made. ARTICLE XI Redemption of Securities SECTION 11.01. Right of Redemption. The Securities may be redeemed at the election of the Company, as a whole or from time to time in part, at any time on or after October 7, 2002, at the Redemption Prices specified in the form of Security hereinbefore set forth, together with accrued interest to the Redemption Date. SECTION 11.02. Applicability of Article. Redemption of Securities at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article XI. SECTION 11.03. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities pursuant to Section 11.01 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company, the Company shall, at least 45 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date in writing and of the principal amount of Securities to be redeemed. SECTION 11.04. Selection by Trustee of Securities to Be Redeemed. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not less than 30 days or more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities not previously called for redemption, by lot or by such method as the Trustee shall deem fair and appropriate in the circumstances and which may provide for the selection for redemption of portions (equal to U.S.$1,000 or any integral multiple thereof) of the principal amount of Securities of a denomination larger than U.S.$1,000. If any Security selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Security so selected, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. Securities which have been converted during a selection 65 59 of Securities to be redeemed shall be treated by the Trustee as Outstanding for the purpose of such selection. The Trustee shall promptly notify the Company and each Security Registrar in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. SECTION 11.05. Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at his address appearing in the Security Register. All notices of redemption shall describe the Securities, including CUSIP number, and state: (1) the Redemption Date; (2) the Redemption Price; (3) if less than all the Outstanding Securities are to be redeemed, the identification (and, in the case of partial redemption of any Securities, the principal amounts) of the particular Securities to be redeemed; (4) that on the Redemption Date the Redemption Price shall become due and payable upon each such Security to be redeemed and that interest thereon shall cease to accrue on and after said date; (5) the conversion price, the date on which the right to convert the Securities to be redeemed will terminate and the place or places where such Securities may be surrendered for conversion; and (6) the place or places where such Securities are to be surrendered for payment of the Redemption Price. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company, and shall be irrevocable. SECTION 11.06. Deposit of Redemption Price. Prior to 11:00 a.m., New York City time, on any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date other than any Securities called for redemption on that date which have been converted prior to the date of such deposit. 66 60 If any Security called for redemption is converted, any money deposited with the Trustee or with any Paying Agent or so segregated and held in trust for the redemption of such Security shall (subject to any right of the Holder of such Security or any Predecessor Security to receive interest as provided in the last paragraph of Section 3.07) be paid to the Company as soon as practicable upon Company Request or, if then held by the Company, shall be released from such trust. SECTION 11.07. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear or accrue any interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to (but not including) the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 3.07. If the Company shall fail to deposit the Redemption Price with the Trustee and any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear and accrue interest from the Redemption Date at the rate borne by the Security. SECTION 11.08. Securities Redeemed in Part. Any Security which is to be redeemed only in part shall be surrendered at an office or agency of the Company designated for that purpose pursuant to Section 10.02 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney-in-fact duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal amount of the Security so surrendered. SECTION 11.09. Conversion Arrangement on Call for Redemption. In connection with any redemption of Securities, the Company may arrange for the purchase and conversion of any Securities by an agreement with one or more investment bankers or other purchasers to purchase such Securities by paying to the Trustee in trust for the Holders, on or before the Redemption Date, an amount not less than the applicable Redemption Price, together with interest accrued to the Redemption Date, of such Securities. Notwithstanding anything to the contrary contained in this Article XI, the obligation of the Company to pay the Redemption Price of such Securities, together with interest accrued to, but excluding, the Redemption Date, shall be deemed to be satisfied and discharged to the extent such amount is so paid by such purchasers. If such an agreement is entered into, a copy of which shall be filed with the Trustee prior to the Redemption Date, any Securities not duly surrendered for conversion by the holders thereof may, at the option of the Company, be deemed, to the fullest extent permitted by law, acquired by such purchasers from such holders and (notwithstanding anything to the contrary contained in Article XIII) surrendered by such purchasers for conversion, all as 67 61 of immediately prior to the close of business on the Redemption Date (and the right to convert any such Securities shall be deemed to have been extended through such time), subject to payment of the above amount as aforesaid. At the written direction of the Company, the Trustee shall hold and dispose of any such amount paid to it in the same manner as it would monies deposited with it by the Company for the redemption of Securities. Without the Trustee's prior written consent, no arrangement between the Company and such purchasers for the purchase and conversion of any Securities shall increase or otherwise affect any of the powers, duties, responsibilities or obligations of the Trustee as set forth in this Indenture, and the Company agrees to indemnify the Trustee from, and hold it harmless against, any loss, liability or expense arising out of or in connection with any such arrangement for the purchase and conversion of any Securities between the Company and such purchasers to which the Trustee has not consented in writing, including the costs and expenses incurred by the Trustee in the defense of any claim or liability arising out of or in connection with the exercise or performance of any of its powers, duties, responsibilities or obligations under this Indenture. Nothing in the preceding sentence shall be deemed to limit the rights and protections afforded to the Trustee in Article VI hereof, including, but not limited to, the right to indemnification pursuant to Section 6.07. ARTICLE XII Subordination of Securities SECTION 12.01. Securities Subordinate to Senior Indebtedness. The Company covenants and agrees, and each Holder of a Security, by his acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article XII, the indebtedness represented by the Securities and the payment of the principal of (and premium, if any) and interest on each and all of the Securities and all obligations of the Company under this Indenture are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness. SECTION 12.02. Payment over of Proceeds upon Dissolution, Etc. In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to the Company or to its creditors, as such, or to its assets, or (b) any liquidation, dissolution or other winding-up of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of the Company, then and in any such event the holders of Senior Indebtedness shall be entitled to receive payment in full of all amounts due or to become due on or in respect of all Senior Indebtedness, or provision shall be made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Indebtedness, before the Holders of the Securities are entitled to receive any payment on account of principal of (or premium, if any) or interest on the Securities, and to that end the holders of Senior Indebtedness shall be entitled to receive, for application to the payment thereof, any payment or distribution of any kind or character, whether in cash, property or securities, which may be payable or deliverable in respect of the Securities in any such case, proceeding, dissolution, liquidation or other winding-up or event. 68 62 In the event that, notwithstanding the foregoing provisions of this Section 12.02, the Trustee or the Holder of any Security shall have received any payment or distribution of assets of the Company prohibited by the foregoing paragraph of any kind or character, whether in cash, property or securities, before all Senior Indebtedness is paid in full or payment thereof provided for, and if such fact shall, at or prior to the time of such payment or distribution, have been made actually known to a Responsible Officer of the Trustee or, as the case may be, such Holder, then and in such event such payment or distribution shall be paid over or delivered forthwith to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. For purposes of this Article XII only, the words "cash, property or securities" shall not be deemed to include shares of capital stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment which in either case are subordinated in right of payment to all Senior Indebtedness which may at the time be outstanding to substantially the same extent as, or to a greater extent than, the Securities are so subordinated as provided in this Article XII. The consolidation of the Company with, or the merger of the Company into, another Person or the liquidation or dissolution of the Company following the conveyance or transfer of its properties and assets substantially as an entirety to another Person upon the terms and conditions set forth in Article VIII shall not be deemed a dissolution, winding-up, liquidation, reorganization, assignment for the benefit of creditors or marshalling of assets and liabilities of the Company for the purposes of this Section 12.02 if the Person formed by such consolidation or into which the Company is merged or which acquires by conveyance or transfer such properties and assets substantially as an entirety, as the case may be, shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions set forth in Article VIII. SECTION 12.03. No Payment When Senior Indebtedness in Default. (a) In the event and during the continuation of any default in the payment of principal of (or premium, if any) or interest on any Senior Indebtedness beyond any applicable grace period with respect thereto (unless and until such payment default shall have been cured or waived in writing by the holders of such Senior Indebtedness), or (b) in the event any judicial proceeding shall be pending with respect to any such default, then no payment shall be made by the Company on account of principal of (or premium, if any) or interest on the Securities or on account of the purchase or other acquisition of Securities (including pursuant to Articles XI and XIII). In the event that, notwithstanding the foregoing, the Company shall make any payment to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section 12.03, and if such fact shall, at or prior to the time of such payment, have been made actually known to a Responsible Officer of the Trustee or, as the case may be, such Holder, then and in such event such payment shall be paid over and delivered forthwith to the Company upon Company Request. The provisions of this Section 12.03 shall not apply to any payment with respect to which Section 12.02 would be applicable. 69 63 SECTION 12.04. Payment Permitted If No Default. Nothing contained in this Article XII or elsewhere in this Indenture or in any of the Securities shall prevent (a) the Company, at any time except during the pendency of any case, proceeding, dissolution, liquidation or other winding-up, assignment for the benefit of creditors or other marshalling of assets and liabilities of the Company referred to in Section 12.02 or under the conditions described in Section 12.03, from making payments at any time of principal of (and premium, if any) or interest on the Securities, or (b) the application by the Trustee of any money deposited with it hereunder to the payment of or on account of the principal of (and premium, if any) or interest on the Securities or the retention of such payment by the Holders, if, at the time of such application by the Trustee, a Responsible Officer of the Trustee did not have actual knowledge that such payment would have been prohibited by the provisions of this Article XII. SECTION 12.05. Subrogation to Rights of Holders of Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness, and until the Securities are paid in full, the Holders of the Securities shall be subrogated (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to indebtedness of the Company to substantially the same extent as the Securities are subordinated and is entitled to like rights of subrogation) to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness to the extent that payments and distributions otherwise payable to Holders of Securities have been applied to the payment of Senior Indebtedness as provided by this Article XII. For purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled, except for the provisions of this Article XII, and no payments over pursuant to the provisions of this Article XII to the holders of Senior Indebtedness by Holders of the Securities or the Trustee, shall, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. SECTION 12.06. Provisions Solely To Define Relative Rights. The provisions of this Article XII are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article XII or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional (and which, subject to the rights under this Article XII of the holders of Senior Indebtedness, is intended to rank equally with all other general obligations of the Company), to pay to the Holders of the Securities the principal of (and premium, if any) and interest on the Securities as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Holders of the Securities and creditors of the Company other than the holders of Senior Indebtedness; or (c) prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, 70 64 subject to the rights, if any, under this Article XII of the holders of Senior Indebtedness to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Holder. SECTION 12.07. Trustee to Effectuate Subordination. Each Holder of a Security by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XII and appoints the Trustee his attorney-in-fact for any and all such purposes. SECTION 12.08. No Waiver of Subordination Provisions. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to the Holders of the Securities and without impairing or releasing the subordination provided in this Article XII or the obligations hereunder of the Holders of the Securities to the holders of Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend or supplement in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; (iv) exercise or refrain from exercising any rights against the Company and any other Person; (v) apply any and all sums received from time to time to the Senior Indebtedness. SECTION 12.09. Notice to Trustee. The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article XII or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until the Trustee shall have received written notice thereof from the Company or a holder of Senior Indebtedness or from any trustee therefor; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 6.01, shall be entitled in 71 65 all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section 12.09 at least two Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any) or interest on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it within two Business Days prior to such date. Subject to the provisions of Section 6.01, the Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee therefor) to establish that such notice has been given by a holder of Senior Indebtedness (or a trustee therefor). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article XII, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XII, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 12.10. Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Company referred to in this Article XII, the Trustee, subject to the provisions of Section 6.01, and the Holders of the Securities shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XII. SECTION 12.11. Trustee Not Fiduciary for Holders of Senior Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and shall not be liable to any such holders if it shall in good faith mistakenly pay over or distribute to Holders of Securities or to the Company or to any other Person cash, property or securities to which any holders of Senior Indebtedness shall be entitled by virtue of this Article XII or otherwise. SECTION 12.12. Rights of Trustee as Holder of Senior Indebtedness; Preservation of Trustee's Rights. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XII with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. 72 66 Nothing in this Article XII shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.07. SECTION 12.13. Article Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article XII shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article XII in addition to or in place of the Trustee; provided, however, that Section 12.12 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. SECTION 12.14. Certain Conversions Deemed Payment. For the purposes of this Article XII only, (1) the issuance and delivery of junior securities upon conversion of Securities in accordance with Article XIII shall not be deemed to constitute a payment or distribution on account of the principal of or premium or interest on Securities or on account of the purchase or other acquisition of Securities, and (2) the payment, issuance or delivery of cash, property or securities (other than junior securities) upon conversion of a Security shall be deemed to constitute payment on account of the principal of such Security. For the purposes of this Section 12.14, the term "junior securities" means (a) shares of any stock of any class of the Company and (b) securities of the Company which are subordinated in right of payment to the prior payment in full of all Senior Indebtedness which may be outstanding at the time of issuance or delivery of such securities to substantially the same extent as, or to a greater extent than, the Securities are so subordinated as provided in this Article XII. Nothing contained in this Article XII or elsewhere in this Indenture or in the Securities is intended to or shall impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, the right, which is absolute and unconditional, of the Holder of any Security to convert such Security in accordance with Article XIII. ARTICLE XIII Conversion of Securities SECTION 13.01. Conversion Privilege and Conversion Price. Subject to and upon compliance with the provisions of this Article XIII, at the option of the Holder thereof, any Security or any portion of the principal amount thereof which is U.S.$1,000 or an integral multiple of U.S.$1,000 may be converted at the principal amount thereof, or of such portion thereof, into fully paid and nonassessable shares of Common Stock of the Company at any time following the latest date of original issuance of Securities at the conversion price, determined as hereinafter provided, in effect at the time of conversion. Such conversion right shall expire at the close of business on the Business Day immediately preceding October 1, 2006, subject, in the case of conversion of any Global Security, to any Applicable Procedures. In case a Security or portion thereof is called for redemption at the election of the Company or the Holder thereof exercised his right to require the Company to purchase the Security, such conversion right in respect of the Security or portion so called shall expire at the close of business, New York or time, on the Business Day immediately preceding the corresponding Redemption Date or Purchase Date, as the case may be, unless the Company defaults in making the payment due upon 73 67 redemption or purchase, as the case may be (in each case subject as aforesaid to any Applicable Procedures with respect to any Global Security). The price at which shares of Common Stock shall be delivered upon conversion (herein called the "conversion price") shall be initially U.S.$123.00 per share of Common Stock. The conversion price shall be adjusted in certain instances as provided in Section 13.04. In case the Company shall, by dividend or otherwise, declare or make a distribution on its Common Stock referred to in paragraph (4) or (5) of Section 13.04, the Holder of each Security, upon the conversion thereof pursuant to this Article XIII subsequent to the close of business on the date fixed for the determination of shareholders entitled to receive such distribution and prior to the effectiveness of the conversion price adjustment in respect of such distribution pursuant to paragraph (4) or (5) of Section 13.04, shall also be entitled to receive for each share of Common Stock into which such Security is converted, the portion of the evidences of indebtedness, shares of capital stock, securities, cash and other property so distributed applicable to one share of Common Stock; provided, however, that, at the election of the Company (whose election shall be evidenced by a Board Resolution) with respect to all Holders so converting, the Company may, in lieu of distributing to such Holder any portion of such distribution not consisting of cash or securities of the Company, pay such Holder an amount in cash equal to the fair market value thereof (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution). If any conversion of a Security described in the immediately preceding sentence occurs prior to the payment date for a distribution to holders of Common Stock which the Holder of the Security so converted is entitled to receive in accordance with the immediately preceding sentence, the Company may elect (such election to be evidenced by a Board Resolution) to distribute to such Holder a due bill for the evidences of indebtedness, shares of capital stock, securities, cash or assets to which such Holder is so entitled; provided that such due bill (i) meets any applicable requirements of the principal national securities exchange or other market on which the Common Stock is then traded and (ii) requires payment or delivery of such evidences of indebtedness, shares of capital stock, securities, cash or assets no later than the date of payment or delivery thereof to holders of Common Stock receiving such distribution. SECTION 13.02. Exercise of Conversion Privilege. In order to exercise the conversion privilege, the Holder of any Security to be converted shall surrender such Security, duly endorsed or assigned to the Company or in blank, at any office or agency maintained by the Company pursuant to Section 10.02, accompanied by (a) written notice (as set forth in Section 2.05 herein) to the Company at such office or agency that the Holder elects to convert such Security or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted and (b) if shares or any portion of such Security not to be converted are to be issued in the name of a Person other than the Holder thereof, and the restrictions on transfer of such Security, set forth in the first paragraph of Section 2.02 remain in effect, a certification of the Holder as to compliance with such restrictions (as set forth in Section 2.07). If the restrictions on transfer of a Security set forth in the first paragraph of Section 2.02 remain in effect, all shares of Common Stock delivered upon conversion thereof shall bear a restrictive legend substantially in the form of such paragraph. 74 68 Except as described in the last paragraph of Section 3.07, no Holder of Securities will be entitled upon conversion thereof to any payment or adjustment on account of accrued and unpaid interest thereon or on account of dividends on the shares of Common Stock issued in connection therewith. Securities surrendered for conversion during the period from the close of business on any Regular Record Date to the opening of business on the corresponding Interest Payment Date (except Securities called for redemption on a Redemption Date within such period between and including such Regular Record Date and such Interest Payment Date) must be accompanied by payment to the Company in New York Clearing House Funds or other funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount converted. Securities shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Securities for conversion in accordance with the foregoing provisions, and at such time the rights of the Holders of such Securities as Holders shall cease, and the Person or Persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock at such time. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of full shares of Common Stock issuable upon conversion, together with payment in lieu of any fraction of a share as provided in Section 13.03. In the case of any Security which is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities of authorized denominations in aggregate principal amount equal to the unconverted portion of the principal amount of such Security. Any requirements for notice, surrender or delivery of Securities pursuant to this Article XIII shall, with respect to any Global Security, be subject to any Applicable Procedures. SECTION 13.03. Fractions of Shares. No fractional shares of Common Stock shall be issued upon conversion of Securities. If more than one Security shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Securities (or specified portions thereof) so surrendered. Instead of any fractional share of Common Stock which would otherwise be issuable upon conversion of any Security or Securities (or specified portions thereof), the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the Closing Price per share of the Common Stock at the close of business on the day of conversion (or, if such day is not a Trading Day, on the Trading Day immediately preceding such day) or, alternatively, the Company shall round up to the next higher whole share. SECTION 13.04. Adjustment of Conversion Price. (1) In case the Company shall pay or make a dividend or other distribution on its Common Stock exclusively in Common Stock, the conversion price in effect at the opening of business on the day next following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such 75 69 determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day next following the date fixed for such determination. For the purposes of this paragraph (1), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company shall not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. (2) In case the Company shall pay or make a dividend or other distribution on its Common Stock consisting exclusively of, or shall otherwise issue to all holders of its Common Stock, rights, warrants or options entitling the holders thereof to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share (determined as provided in paragraph (7) of this Section 13.04) of the Common Stock on the date fixed for the determination of shareholders entitled to receive such rights, warrants or options, the conversion price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (2), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company shall not issue any rights, warrants or options in respect of shares of Common Stock held in the treasury of the Company. (3) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the conversion price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the conversion price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (4) Subject to the last sentence of this paragraph (4), in case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness, shares of any class of capital stock, securities, cash or property (excluding any rights, warrants or options referred to in paragraph (2) of this Section 13.04, any dividend or distribution paid exclusively in cash and any dividend or distribution referred to in paragraph (1) of this Section 13.04), the conversion price shall be reduced so that the same shall equal the price determined by multiplying the 76 70 conversion price in effect immediately prior to the effectiveness of the conversion price reduction contemplated by this paragraph (4) by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (7) of this Section 13.04) of the Common Stock on the date of such effectiveness less the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution and shall, in the case of securities being distributed for which prior thereto there is an actual or when issued trading market, be no less than the value determined by reference to the average of the closing prices in such market over the period specified in the succeeding sentence), on the date of such effectiveness, of the portion of the evidences of indebtedness, shares of capital stock, securities, cash and property so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day next following the later of (a) the date fixed for the payment of such distribution and (b) the date 20 days after the notice relating to such distribution is given pursuant to Section 13.06(a) (such later date of (a) and (b) being referred to as the "Reference Date"). If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (4) by reference to the actual or when issued trading market for any securities comprising such distribution, it must in doing so consider the prices in such market over the same period used in computing the current market price per share pursuant to paragraph (7) of this Section. For purposes of this paragraph (4), any dividend or distribution that includes shares of Common Stock or rights, warrants or options to subscribe for or purchase shares of Common Stock shall be deemed instead to be (a) a dividend or distribution of the evidences of indebtedness, cash, property, shares of capital stock or securities other than such shares of Common Stock or such rights, warrants or options (making any conversion price reduction required by this paragraph (4)) immediately followed by (b) a dividend or distribution of such shares of Common Stock or such rights (making any further conversion price reduction required by paragraph (1) or (2) of this Section 13.04, except (i) the Reference Date of such dividend or distribution as defined in this paragraph (4) shall be substituted as "the date fixed for the determination of shareholders entitled to receive such dividend or other distributions", "the date fixed for the determination of shareholders entitled to receive such rights, warrants or options" and "the date fixed for such determination" within the meaning of paragraphs (1) and (2) of this Section 13.04 and (ii) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of paragraph (1) of this Section 13.04). (5) In case the Company shall, by dividend or otherwise, make a distribution to all holders of its Common Stock exclusively in cash in an aggregate amount that, together with (i) the aggregate amount of any other distributions to all holders of its Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no conversion price adjustment pursuant to this paragraph (5) has been made and (ii) the aggregate of any cash plus the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution), as of the expiration of the tender or exchange offer referred to below, of consideration payable in respect of any tender or exchange offer by the Company or a Subsidiary for all or any portion of the Common Stock concluded within the 12 months preceding the date of payment of such distribution and in respect of which no conversion price adjustment pursuant to paragraph (6) of this Section 13.04 has been made, exceeds 12.5% of the 77 71 product of the current market price per share (determined as provided in paragraph (7) of this Section 13.04) of the Common Stock on the date fixed for shareholders entitled to receive such distribution times the number of shares of Common Stock outstanding on such date, the conversion price shall be reduced so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the effectiveness of the conversion price reduction contemplated by this paragraph (5) by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (7) of this Section 13.04) of the Common Stock on the date of such effectiveness less the amount of cash so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the later of (a) the day following the date fixed for the payment of such distribution and (b) the date 20 days after the notice relating to such distribution is given pursuant to Section 13.06(a). (6) In case a successful tender or exchange offer made by the Company or any Subsidiary for all or any portion of the Common Stock shall involve an aggregate consideration having a fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended) that, together with (i) the aggregate of the cash plus the fair market value (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution), as of the expiration of the other tender or exchange offer referred to below, of consideration payable in respect of any other tender or exchange offer by the Company or a Subsidiary for all or any portion of the Common Stock concluded within the preceding 12 months and in respect of which no conversion price adjustment pursuant to this paragraph (6) has been made and (ii) the aggregate amount of any distributions to all holders of the Common Stock made exclusively in cash within the preceding 12 months and in respect of which no conversion price adjustment pursuant to paragraph (5) of this Section 13.04 has been made, exceeds 12.5% of the product of the current market price per share (determined as provided in paragraph (7) of this Section 13.04) of the Common Stock on the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) on the Expiration Time, the conversion price shall be reduced (but not increased) so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be (i) the product of the current market price per share (determined as provided in paragraph (7) of this Section 13.04) of the Common Stock at the Expiration Time times the number of shares of Common Stock outstanding (including any tendered or exchanged shares) at the Expiration Time minus (ii) the fair market value (determined as aforesaid) of the aggregate consideration payable to shareholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and the denominator shall be the product of (i) such current market price per share at the Expiration Time times (ii) such number of outstanding shares at the Expiration Time less the number of Purchased Shares, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. 78 72 (7) For the purpose of any computation under this paragraph and paragraphs (2), (4) and (5) of this Section 13.04, the current market price per share of Common Stock on any date in question shall be deemed to be the average of the daily Closing Prices for the 5 consecutive Trading Days selected by the Company commencing not more than 20 Trading Days before, and ending not later than, the date in question; provided, however, that (i) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the conversion price pursuant to paragraph (1), (2), (3), (4), (5) or (6) above ("Other Event") occurs on or after the 20th Trading Day prior to the date in question and prior to the "ex" date for the issuance or distribution requiring such computation (the "Current Event"), the Closing Price for each Trading Day prior to the "ex" date for such Other Event shall be adjusted by multiplying such Closing Price by the same fraction by which the conversion price is so required to be adjusted as a result of such Other Event, (ii) if the "ex" date for any Other Event occurs after the "ex" date for the Current Event and on or prior to the date in question, the Closing Price for each Trading Day on and after the "ex" date for such Other Event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the conversion price is so required to be adjusted as a result of such Other Event, (iii) if the "ex" date for any Other Event occurs on the "ex" date for the Current Event, one of those events shall be deemed for purposes of clauses (i) and (ii) of this proviso to have an "ex" date occurring prior to the "ex" date for the other event, and (iv) if the "ex" date for the Current Event is on or prior to the date in question, after taking into account any adjustment required pursuant to clause (ii) of this proviso, the Closing Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value on the date in question (as determined in good faith by the Board of Directors in a manner consistent with any determination of such value for purposes of paragraph (4) or (5) of this Section 13.04, whose determination shall be conclusive and described in a Board Resolution) of the portion of the rights, warrants, options, evidences of indebtedness, shares of capital stock, securities, cash or property being distributed applicable to one share of Common Stock. For the purpose of any computation under paragraph (6) of this Section 13.04, the current market price per share of Common Stock on any date in question shall be deemed to be the average of the daily Closing Prices for the 5 consecutive Trading Days selected by the Company commencing on or after the latest (the "Commencement Date") of (i) the date 20 Trading Days before the date in question, (ii) the date of commencement of the tender or exchange offer requiring such computation and (iii) the date of the last amendment, if any, of such tender or exchange offer involving a change in the maximum number of shares for which tenders are sought or a change in the consideration offered, and ending not later than the date of the Expiration Time of such tender or exchange offer (or, if such Expiration Time occurs before the close of trading on a Trading Day, not later than the Trading Day immediately preceding the date of such Expiration Time); provided, however, that if the "ex" date for any Other Event (other than the tender or exchange offer requiring such computation) occurs on or after the Commencement Date and on or prior to the date of the Expiration Time for the tender or exchange offer requiring such computation, the Closing Price for each Trading Day prior to the "ex" date for such Other Event shall be adjusted by multiplying such Closing Price by the same fraction by which the conversion price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, (i) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the Closing Price was obtained without the right to receive such issuance or distribution, (ii) when used with respect to any subdivision or combination of shares of Common Stock, means the first 79 73 date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (iii) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the Expiration Time of such tender or exchange offer. (8) The Company may make such reductions in the conversion price, in addition to those required by paragraphs (1), (2), (3), (4), (5) and (6) of this Section, as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients, or to diminish the amount of such tax payable. (9) To the extent permitted by applicable law, the Company may from time to time decrease the conversion price by any amount for any period of time so long as (i) such period of time is at least 20 days, (ii) such decrease is irrevocable during such period and (iii) the Board of Directors has determined that such a decrease is in the best interests of the Company, which determination shall be conclusive. No such decrease may be taken into account when determining whether the Closing Price of the Common Stock exceeds the conversion price for purposes of clause (i) of the third paragraph of Section 14.07. Whenever the conversion price is decreased pursuant to the first sentence of this paragraph (9), the Company shall give notice of the decrease to the Holders of Securities in the manner provided in Section 1.06 at least 15 days prior to the date the decreased conversion price takes effect, and such notice shall state the decreased conversion price and the period during which it will be in effect. (10) No adjustment in the conversion price shall be required unless such adjustment would require an increase or decrease of at least 1% in the conversion price; provided, however, that any adjustments which by reason of this paragraph (10) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (11) In the event that the Company distributes rights or warrants (other than those referred to in paragraph (2) above) pro rata to holders of Common Stock, so long as any such rights or warrants have not expired or been redeemed by the Company, the Company shall make proper provision so that the Holder of any Security surrendered for conversion will be entitled to receive upon such conversion, in addition to the Conversion Shares, a number of rights and warrants to be determined as follows: (i) if such conversion occurs on or prior to the date for the distribution to the holders of rights or warrants of separate certificates evidencing such rights or warrants (the "Distribution Date"), the same number of rights or warrants to which a holder of a number of shares of Common Stock equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the rights or warrants, and (ii) if such conversion occurs after such Distribution Date, the same number of rights or warrants to which a holder of the number of shares of Common Stock into which the principal amount of such Security so converted was convertible immediately prior to such Distribution Date would have been entitled on such Distribution Date in accordance with the terms and provisions of and applicable to the rights or warrants. 80 74 SECTION 13.05. Notice of Adjustments of Conversion Price. Whenever the conversion price is adjusted as herein provided: (a) the Company shall compute the adjusted conversion price in accordance with Section 13.04 and shall prepare a certificate signed by the Treasurer of the Company setting forth the adjusted conversion price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed (with a copy to the Trustee) at each office or agency maintained for the purpose of conversion of Securities pursuant to Section 10.02; and (b) a notice stating that the conversion price has been adjusted and setting forth the adjusted conversion price shall forthwith be required, and as soon as practicable after it is required, such notice shall be mailed by the Company to all Holders at their last addresses as they shall appear in the Security Register. SECTION 13.06. Notice of Certain Corporate Action. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock that would require a conversion price adjustment pursuant to paragraph (5) of Section 13.04; or (b) the Company shall authorize the granting to all holders of its Common Stock of rights, warrants or options to subscribe for or purchase any shares of capital stock of any class or of any other rights (excluding rights distributed pursuant to any shareholder rights plan); or (c) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding, up of the Company; or (e) the Company or any Subsidiary of the Company shall commence a tender or exchange offer for all or a portion of the Company's outstanding shares of Common Stock (or shall amend any such tender or exchange offer); then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Securities pursuant to Section 10.02, and shall cause to be mailed to all Holders at their last addresses as they shall appear in the Security Register, at least 20 days (or 10 days in any case specified in clause (a) or (b) above) prior to the applicable record, effective or expiration date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights, warrants or options, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, warrants or options are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that 81 75 holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up, or (z) the date on which such tender offer commenced, the date on which such tender offer is scheduled to expire unless extended, the consideration offered and the other material terms thereof (or the material terms of any amendment thereto). SECTION 13.07. Company to Reserve Common Stock. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, solely for the purpose of effecting the conversion of Securities, the whole number of shares of Common Stock then issuable upon the conversion in full of all outstanding Securities. SECTION 13.08. Taxes on Conversions. The Company will pay any and all taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of Securities pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the Holder of the Security or Securities to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid. SECTION 13.09. Covenant as to Common Stock. The Company covenants that all shares of Common Stock which may be issued upon conversion of Securities will upon issue be newly issued (and not treasury shares) and be duly authorized, validly issued, fully paid and nonassessable and, except as provided in Section 13.08, the Company will pay all taxes, liens and charges with respect to the issue thereof. SECTION 13.10. Cancellation of Converted Securities. All Securities delivered for conversion shall be delivered to the Trustee to be cancelled by or at the direction of the Trustee, which shall dispose of the same as provided in Section 3.09. SECTION 13.11. Provisions in Case of Reclassification, Consolidation, Merger or Sale of Assets. In the event that the Company shall be a party to any transaction (including without limitation any (i) recapitalization or reclassification of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination of the Common Stock), (ii) consolidation of the Company with, or merger of the Company into, any other person. any merger of another person into the Company (other than a merger which does not result in a reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company), (iii) sale or transfer of all or substantially all of the assets of the Company, or (iv) other transaction) pursuant to which the Common Stock is converted into the right to receive other securities, cash or other property, then lawful provision shall be made as part of the terms of such transaction whereby the Holder of each Security then outstanding shall have the right thereafter to convert such Security only into (subject to funds being legally available for such purpose under applicable law at the time of such conversion) the kind and amount of securities, cash and other property receivable upon such transaction by a holder of the number of shares of Common Stock into which such Security might have been converted 82 76 immediately prior to such transaction. The Company or the person formed by such consolidation or resulting from such merger or which acquired such assets or which acquired the Company's shares, as the case may be, shall execute and deliver to the Trustee a supplemental indenture establishing such rights. Such supplemental indenture shall provide for adjustments which, for events subsequent to the effective date of such supplemental indenture, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The above provisions of this Section 13.11 shall similarly apply to successive transactions of the foregoing type. SECTION 13.12. Trustee Adjustment Disclaimer. The Trustee has no duty to determine when an adjustment under this Article XIII should be made, how it should be made or what it should be. The Trustee has no duty to determine whether a supplemental indenture need be entered into or whether any provisions of any supplemental indenture are correct. The Trustee shall not be accountable for and makes no representation as to the validity or value of any securities or assets issued upon conversion of Securities. The Trustee shall not be responsible for the Company's failure to comply with this Article XIII. ARTICLE XIV Right to Require Purchase SECTION 14.01. Right to Require Purchase. In the event that there shall occur a Change in Control, then each Holder shall have the right, at such Holder's option, to require the Company, subject to the provisions of Section 12.03, to purchase all or any designated part of such Holder's Securities on the date (the "Purchase Date") fixed by the Company that is not less than 30 days nor more than 45 days after the date the Company gives notice of the Change in Control as contemplated in Section 14.03(a) at a price (the "Purchase Price") equal to 100% of the principal amount thereof, together with accrued and unpaid interest through the Purchase Date. Such right to require the purchase of Securities shall not continue after a discharge of the Company from its obligations with respect to the Securities in accordance with Article IV. At the option of the Company, the Purchase Price may be paid in cash or, subject to the fulfillment by the Company of the conditions set forth Section 14.02 hereof, by delivery of shares of Common Stock in accordance with Section 14.02. Whenever in this Indenture (including Sections 2.02, 3.01, 5.01(1) and 5.08) there is a reference, in any context, to the principal of any Security as of any time, such reference shall be deemed to include reference to the Purchase Price payable in respect of such Security to the extent that such Purchase Price is, was or would be so payable at such time, and express mention of the Purchase Price in any provision of this Indenture shall not be construed as excluding the Purchase Price in those provisions of this Indenture when such express mention is not made. Any requirements for notice, surrender or delivery of Securities pursuant to this Article XIV shall, with respect to any Global Security, be subject to any Applicable Procedures. SECTION 14.02. Conditions and Procedures Relating to the Company's Election to Pay the Purchase Price in Common Stock. (a) The Company may elect to pay the Purchase Price by delivery of shares of Common Stock pursuant to Section 14.01 so long as the following conditions precedent are satisfied: 83 77 (i) The shares of Common Stock deliverable in payment of the Purchase Price shall have a fair market value as of the Purchase Date of not less than the Purchase Price. For purposes of Section 14.01 and this Section 14.02, the fair market value of shares of Common Stock shall be determined by the Company and shall be equal to 95% of the average of the Closing Prices of the Common Stock for the five consecutive Trading Days immediately preceding and including the third Trading Day prior to the Purchase Date; (ii) The shares of Common Stock to be issued upon purchase of Notes pursuant to this Article XIV (A) shall not require registration under any federal securities law before such shares may be freely transferable without being subject to any transfer restrictions under the Securities Act upon purchase pursuant to this Article XIV or, if such registration is required, such registration shall be completed and shall become effective prior to the Purchase Date, and (B) shall not require registration with or approval of any governmental authority under any state law or any other federal law before such shares may be validly issued or delivered upon purchase pursuant to this Article XIV or if such registration is required or such approval must be obtained, such registration shall be completed or such approval shall be obtained prior to the Purchase Date; (iii) The shares of Common Stock to be issued upon purchase of Notes pursuant to this Article XIV are, or shall have been, approved for listing on Nasdaq or the New York Stock Exchange or listed on another national securities exchange, in any case, prior to the Purchase Date; and (iv) All shares of Common Stock which may be issued upon purchase of Notes pursuant to this Article XIV will be issued out of the Company's authorized but unissued Common Stock and, will upon issue, be duly and validly issued and fully paid and non-assessable and free of any preemptive or similar rights. If all of the conditions set forth in this Section 14.02(a) are not satisfied in accordance with the terms hereof, the Purchase Price shall be paid by the Company only in cash. (b) Any issuance of shares of Common Stock in respect of the Purchase Price shall be deemed to have been effected immediately prior to the close of business on the Purchase Date and the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such purchase shall be deemed to have become on the Purchase Date the holder or holders of record of the shares represented thereby; provided, however, that any surrender for purchase on a date when the stock transfer books of the Company shall be closed shall constitute the Person or Persons in whose name or names the certificate or certificates for such shares are to be issued as the record holder or holders thereof for all purposes at the opening of business on the next succeeding day on which such stock transfer books are open. No payment or adjustment shall be made for dividends or distributions on any Common Stock issued upon purchase of any Note pursuant to this Article XIV declared prior to the Purchase Date. (c) No fractions of shares shall be issued upon purchase of Notes pursuant to this Article XIV. If more than one Note shall be purchased from the same Holder and the Purchase Price shall be payable in shares of Common Stock, the number of full shares 84 78 which shall be issuable upon such purchase shall be computed on the basis of the aggregate principal amount of the Notes so purchased. Instead of any fractional share of Common Stock which would otherwise be issuable on the purchase of any Note or Notes pursuant to this Article XIV, the Company will deliver to the applicable Holder its check for the current market value of such fractional share. The current market value of a fraction of a share is determined by multiplying the Closing Price of a full share on the Trading Day immediately preceding the Purchase Date by the fraction, and rounding the result to the nearest cent. (d) Any issuance and delivery of certificates for shares of Common Stock on purchase of Notes pursuant to this Article XIV shall be made without charge to the Holder of Notes being purchased for such certificates or for any tax or duty in respect of the issuance or delivery of such certificates or the Notes represented thereby; provided, however, that the Company shall not be required to pay any tax or duty which may be payable in respect of (i) income of the Holder or (ii) any transfer involved in the issuance or delivery of certificates for shares of Common Stock in a name other than that of the Holder of the Notes being purchased, and no such issuance or delivery shall be made unless and until the Person requesting such issuance or delivery has paid to the Company the amount of any such tax or duty or has established, to the satisfaction of the Company, that such tax or duty has been paid. SECTION 14.03. Notice, Method of Exercising Purchase Right. (a) On or before the 15th day after the Company knows or reasonably should know a Change in Control has occurred, the Company, or at the written request of the Company, the Trustee (in the name and at the expense of the Company), shall give notice of the occurrence of the Change in Control and of the purchase right set forth herein arising as a result thereof by first-class mail, postage prepaid, or by telefacsimile with written acknowledgment of transmittal to each Holder of the Securities at such Holder's address appearing in the Security Register. The Company shall also deliver a copy of such notice of a purchase right to the Trustee. Each notice of a purchase right shall state: (1) the Purchase Date, (2) the date by which the purchase right must be exercised, (3) the Purchase Price, (4) whether the Purchase Price will be paid in the form of cash or Common Stock as provided in this Indenture and that such determination is irrevocable, and (5) the instructions a Holder must follow to exercise its purchase right. No failure of the Company to give the foregoing notice shall limit any Holder's right to exercise a purchase right. The Trustee shall have no affirmative obligation to determine if there shall have occurred a Change in Control. (b) To exercise a purchase right, a Holder shall deliver to the Company (or an agent designated by the Company for such purpose in the notice referred to in (a) 85 79 above) and to the Trustee on or before the 30th day after the date of transmittal of the notice referred to in (a) above (i) written notice of the Holder's exercise of such right, which notice shall set forth the name of the Holder, the principal amount of the Security or Securities (or portion of a Security) to be purchased, and a statement that an election to exercise the purchase right is being made thereby, and (ii) the Security or Securities with respect to which the purchase right is being exercised, duly endorsed for transfer to the Company. Such written notice shall be irrevocable. If the Purchase Date falls between any Regular Record Date and the corresponding succeeding Interest Payment Date, Securities to be purchased must be accompanied by payment from the Holder of an amount equal to the interest thereon which the registered Holder thereof is to receive on such Interest Payment Date. (c) In the event a purchase right shall be exercised in accordance with the terms hereof, the Company shall on the Purchase Date pay or cause to be paid in cash or shares of Common Stock, as provided herein, to the Holder thereof the Purchase Price of the Security or Securities as to which the purchase right had been exercised. SECTION 14.04. Deposit of Purchase Price. On or prior to the Purchase Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) cash or shares of Common Stock, as provided herein, sufficient to pay the Purchase Price of the Securities which are to be repaid on the Purchase Date. SECTION 14.05. Securities Not Purchased on Purchase Date. If any Security surrendered for purchase shall not be so paid on the Purchase Date, the principal of such Security shall, until paid, bear interest from the Purchase Date at a rate borne by such Security. SECTION 14.06. Securities Purchased in Part. Any Security which is to be purchased only in part shall be surrendered at any office or agency of the Company designated for that purpose pursuant to Section 10.02 (with, if the Company or the Trustee so requires, due endorsement by, or written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unpurchased portion of the principal of the Security so surrendered. SECTION 14.07. Certain Definitions. For purposes of this Article: The term "Beneficial Owner" shall be determined in accordance with Rules 13d-3 and 13d-5 promulgated by the Commission under the Exchange Act, or any successor provision thereto, except that a Person shall be deemed to have "beneficial ownership" of all shares that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time. A "Change in Control" shall be deemed to have occurred at such time as (a) any Person, or any Persons acting together in a manner which would constitute a "group" (a "Group") for purposes of Section 13(d) of the Exchange Act, or any successor provision thereto, together with any Affiliates thereof, (i) become the Beneficial Owners, directly or indirectly, of capital stock of the Company, entitling such Person or Persons 86 80 and its or their Affiliates to exercise more than 50% of the total voting power of all classes of the Company's capital stock entitled to vote generally in the election of directors or (ii) shall succeed in having sufficient of its or their nominees (who are not supported by a majority of the then current Board of Directors of the Company) elected to the Board of Directors of the Company such that such nominees, when added to any existing directors remaining on the Board of Directors of the Company after such election who are Affiliates of or acting in concert with any such Persons, shall constitute a majority of the Board of Directors of the Company, (b) the Company shall be a party to any transaction pursuant to which the Common Stock is converted into the right to receive other securities (other than common stock), cash and/or property (or the Company, by dividend, tender or exchange offer or otherwise, distributes other securities, cash and/or property to holders of Common Stock) and the value of all such securities, cash and/or property distributed in such transaction and any other transaction effected within the 12 months preceding consummation of such transaction (as determined in good faith by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) is more than 50% of the average of the daily Closing Prices for the five consecutive Trading Days ending on the Trading Day immediately preceding the date of such transaction (or, if earlier, the Trading Day immediately preceding the ex date (as defined in paragraph (7) of Section 13.04) for such transaction) or (c) the Company shall consolidate with or merge into any other Person or sell, convey, transfer or lease its properties and assets substantially as an entirety to any Person other than a Subsidiary, or any other Person shall consolidate with or merge into the Company (other than, in the case of this clause (c), pursuant to any consolidation or merger where Persons who are shareholders of the Company immediately prior thereto become the Beneficial Owners of shares of capital stock of the surviving company entitling such Persons to exercise more than 50% of the total voting power of all classes of such surviving company's capital stock entitled to vote generally in the election of directors). Notwithstanding the foregoing, a "Change in Control" will be deemed not to have occurred (i) if the Closing Price of the Common Stock for any five Trading Days during the ten Trading Days immediately preceding the Change in Control is at least equal to 105% of the conversion price in effect immediately preceding the Change in Control or (ii) if at least 90% of the consideration (excluding cash payments for fractional shares or cash payments for appraisal rights) received or to be received by the shareholders of the Company in the transaction or transactions constituting the Change in Control consists of (x) shares of common stock of an entity organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia the common stock of which is, or upon issuance will be, traded on a national securities exchange in the United States of America or through Nasdaq or (y) shares of common stock of an entity organized and validly existing under the laws of a jurisdiction outside of the United States of America, or American Depositary Shares representing such shares of common stock, that are, or upon issuance will be, traded on a national securities exchange in the United States of America or through Nasdaq, if such entity has a worldwide total market capitalization of its equity securities of at least U.S. $5 billion. ARTICLE XV Defeasance and Covenant Defeasance SECTION 15.01. Company's Option to Effect Defeasance or Covenant Defeasance. The Company may at its option by Board Resolution, at any time, elect to 87 81 have either Section 15.02 or Section 15.03 applied to the Outstanding Securities upon compliance with the conditions set forth below in this Article XV. SECTION 15.02. Defeasance and Discharge. Upon the Company's exercise of the option provided in Section 15.01 applicable to this Section, the Company shall be deemed to have been discharged from its obligations with respect to the Outstanding Securities (other than those specified below), the Holders and any holders of Senior Indebtedness, and the provisions of Article XII hereof shall cease to be effective, on the date the conditions set forth below are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Securities, the Company shall be deemed to have satisfied all their other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of such Securities to receive, solely from the trust fund described in Section 15.04 and as more fully set forth in such Section, payments in respect of the principal of, premium, if any and interest on such Securities when such payments are due, (B) the Company's obligations with respect to such Securities under Sections 3.04, 3.05, 3.06, 10.02, 10.03, 10.11, Article XIII and Article XIV, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article XV. Subject to compliance with this Article XV, the Company may exercise its option under this Section 15.02 notwithstanding the prior exercise of its option under Section 15.03. SECTION 15.03. Covenant Defeasance. Upon the Company's exercise of the option provided in Section 15.01 applicable to this Section, (i) the Company shall be released from its obligations under Section 10.06 and Section 10.07, (ii) the occurrence of an event specified in Section 5.01(4) (with respect to either of Section 10.06 or Section 10.07) or 5.01(5) shall not be deemed to be an Event of Default and (iii) the provisions of Article XII hereof shall cease to be effective on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"). For this purpose, such covenant defeasance means that the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section or Article, whether directly or indirectly by reason of any reference elsewhere herein to any such Section or Article or by reason of any reference in any such Section or Article to any other provision herein or in any other document, but the remainder of this Indenture and such Securities shall be unaffected thereby. SECTION 15.04. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 15.02 or Section 15.03 to the then Outstanding Securities: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.09 who shall agree to comply with the provisions of this Article XV applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the 88 82 due date of any payment, money in an amount, or (C) a combination thereof, sufficient, in the written opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of, premium, if any, and each installment of interest on the Securities on the Stated Maturity of such principal or installment of interest in accordance with the terms of this Indenture and of such Securities. For this purpose, "U.S. Government Obligations" means securities that are (x) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. (2) In the case of an election under Section 15.02, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (y) since the date of this Indenture there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities will not recognize gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred. (3) In the case of an election under Section 15.03, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Securities will not recognize gain or loss for Federal income tax purposes as a result of such deposit and covenant defeasance and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit and covenant defeasance had not occurred. (4) The Company shall have delivered to the Trustee an Officers' Certificate to the effect that the Securities, if then listed on any securities exchange, will not be delisted as a result of such deposit. (5) Such defeasance or covenant defeasance shall not cause the Trustee to have a conflicting interest as defined in Section 6.08 and for purposes of the Trust Indenture Act with respect to any securities of the Company. 89 83 (6) At the time of such deposit: (A) no default in the payment of all or a portion of principal of (or premium, if any) or interest on or other obligations in respect of any Senior Indebtedness shall have occurred and be continuing, and no event of default with respect to any Senior Indebtedness shall have occurred and be continuing and shall have resulted in such Senior Indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable and (B) no other event with respect to any Senior Indebtedness shall have occurred and be continuing permitting (after notice or the lapse of time, or both) the holders of such Senior Indebtedness (or a trustee on behalf of the holders thereof) to declare such Senior Indebtedness due and payable prior to the date on which it would otherwise have become due and payable, or, in the case of either clause (A) or clause (B) above, each such default or event of default shall have been cured or waived or shall have ceased to exist. (7) No Event of Default or event which with notice or lapse of time or both would become an Event of Default shall have occurred and be continuing on the date of such deposit or, insofar as subsections 5.01(6) and (7) are concerned, at any time during the period ending on the 121st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (8) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which it is bound. (9) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the defeasance under Section 15.02 or the covenant defeasance under Section 15.03 and Section 15.04 (as the case may be) have been complied with. (10) Such defeasance or covenant defeasance shall not result in the trust arising from such deposit constituting an investment company as defined in the Investment Company Act of 1940, as amended, or such trust shall be qualified under such act or exempt from regulation thereunder. SECTION 15.05. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 10.03, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee collectively, for purposes of this Section 15.05, the "Trustee") pursuant to Section 15.04 in respect of the Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities, of all sums due and to become due thereon in respect of principal, premium, if any, and interest. Money so held in trust shall not be subject to the provisions of Article XII. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 15.04 or the principal and interest received in respect thereof other 90 84 than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Securities. Anything in this Article XV to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 15.04 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance. SECTION 15.06. Reinstatement. If the Trustee or the Paying Agent is unable to apply any money in accordance with Section 15.02 or 15.03 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article XV until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 15.02 or 15.03; provided, however, that if the Company makes any payment of principal of, premium, if any, or interest on any Security following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money held by the Trustee or the Paying Agent. ARTICLE XVI Immunity SECTION 16.01. Personal Immunity of Incorporators, Shareholders, Directors and Officers. No recourse for the payment of the principal of or interest on the Securities, and no recourse under or upon any obligation, covenant or agreement contained in this Indenture or in any indenture supplemental hereto, or in the Securities, or because of any indebtedness evidenced thereby, shall be had against any incorporator, or against any past, present or future shareholder, officer or director, as such, of the Company or any successor corporation, either directly or through the Company or any successor corporation, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance of the Securities by the Holders thereof and as part of the consideration for the issue of the Securities. Each and every Holder of the Securities, by receiving and holding the same, agrees to the provisions of this Section 16.01 and waives and releases any and all such recourse, claim and liability. 91 This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. AFFYMETRIX, INC. by /s/ Vern Norviel Name: Title: 92 THE BANK OF NEW YORK, by /s/ Michele Russo Name: Title: EX-5.1 3 OPINION RE VALIDITY 1 EXHIBIT 5.1 AFFYMETRIX LETTERHEAD October 14, 1999 Affymetrix, Inc. 3380 Central Expressway Santa Clara, California 95051 Dear Ladies and Gentlemen: In connection with the registration under the Securities Act of 1933, as amended, of 1,070,000 shares of Common Stock, par value $.01 per share (the "Shares"), of Affymetrix, Inc., a Delaware corporation, and the related preferred stock purchase rights (the "Rights") issued pursuant to the Rights Agreement, dated as of October 15, 1998 (the "Rights Agreement"), between Affymetrix and American Stock Transfer & Trust Company, as Rights Agent (the "Rights Agent"), I, as your general counsel, have examined such corporate records, certificates and other documents, and such questions of law, as I have considered necessary or appropriate for the purposes of this opinion. Upon the basis of such examination, I advise you that, in my opinion: (1) The Shares have been duly authorized and, upon compliance with the exchange procedures set forth in Article V of the Merger Agreement, dated as of September 10, 1999 (the "Merger Agreement"), among Affymetrix, Inc., Genetic MicroSystems, Inc., GMS Acquisition, Inc., Jean Montagu and the stockholders of Genetic MicroSystems set forth on the signature pages to the Merger Agreement (the "Exchange Procedures"), the Shares will be validly issued, fully paid and nonassessable. (2) The issuance of the Rights has been duly authorized by Affymetrix. (3) Assuming that the board of directors of Affymetrix, after fully informing itself as to matters relating to the Rights Agreement and the Rights and after giving due consideration to all relevant matters, determined that the execution and delivery of the Rights Agreement and the issuance of Rights thereunder would be in the best interests of Affymetrix and its stockholders, and assuming further that the Rights Agreement has been duly authorized, executed and delivered by the Rights Agent, then upon compliance with the Exchange Procedures, the Rights will be validly issued. In connection with my opinion set forth in paragraph (2) above, I note that the question whether the board of directors of Affymetrix might be required to redeem the Rights at some future time will depend upon facts and circumstances existing at that time and, accordingly, is beyond the scope of such opinion. The foregoing opinion is limited to the federal laws of the United States and the General Corporation Law of the State of Delaware, and I am expressing no opinion as to the effect of the laws of any other jurisdiction. I am not a member of the Bar of the State of Delaware, and I have relied on the 2 advice of Sullivan & Cromwell with respect to interpretations of the General Corporation Law of the State of Delaware. I have relied as to certain matters on information obtained from public officials, officers of Affymetrix and other sources believed by me to be responsible. I hereby consent to the filing of this opinion as an exhibit to the Registration Statement relating to the Shares and the Rights and to the reference to me under the heading "Validity of Shares" in the Proxy Statement/Prospectus relating to the Shares and the Rights. In giving such consent, I do not thereby admit that I am in the category of persons whose consent is required under Section 7 of the Act. Very truly yours, /s/ Vern Norviel, Esq. Senior Vice President, General Counsel and Corporate Secretary Affymetrix, Inc. EX-8.1 4 OPINION RE TAX MATTERS 1 Exhibit 8.1 October 14, 1999 Affymetrix, Inc., 3380 Central Expressway, Santa Clara, California 95051. Ladies and Gentlemen: We have acted as counsel to Affymetrix, Inc. ("Affymetrix") in connection with the merger (the "Merger") of Genetic MicroSystems, Inc. ("GMS") with and into GMS Acquisition, Inc., a wholly-owned subsidiary of Affymetrix ("Merger Sub"), pursuant to the Agreement and Plan of Merger, dated as of September 10, 1999 (the "Agreement"). Affymetrix is offering up to 1,070,000 shares of its common stock in connection with the Merger pursuant to its Registration Statement on Form S-4 (the "Registration Statement") filed pursuant to the Securities Act of 1933, as amended (the "Securities Act"). Capitalized terms used but not defined herein shall have the meanings specified in the Agreement. We have assumed, with your consent, that (1) the Merger will be effected in accordance with the Agreement, (2) the representations contained in the letters of representation from Affymetrix, Merger Sub and GMS to us, each dated October 14, 1999, are true, correct and accurate as of the date hereof and will be true, correct and 2 Affymetrix, Inc. -2- accurate as of the Effective Time of the Merger and (3) the Merger will qualify as a merger under Massachusetts law. We hereby confirm to you that, in our opinion, the statements set forth in the Registration Statement under the caption "Material Federal Income Tax Consequences" insofar as they relate to matters of United States federal income tax law, subject to the limitations set forth thereunder, are a fair and accurate summary of the matters therein discussed. We hereby consent to the filing of this letter as an exhibit to the Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act. Very truly yours, /s/ SULLIVAN AND CROMWELL EX-8.2 5 OPINION RE TAX MATTERS 1 EXHIBIT 8.2 PALMER & DODGE LLP One Beacon Street, Boston, MA 02108-3190 Telephone: (617) 573-0100 Facsimile: (617) 227-4420 October 14, 1999 Genetic MicroSystems, Inc. 34 Commerce Way Woburn, Massachusetts 01801 Ladies and Gentlemen: We have acted as counsel to Genetic MicroSystems, Inc. ("GMS"), a Massachusetts corporation, in connection with the proposed merger (the "Merger") of GMS with and into GMS Acquisition, Inc. ("Merger Sub"), a Massachusetts corporation and a wholly owned subsidiary of Affymetrix, Inc. ("Affymetrix"), a Delaware corporation, pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated as of September 10, 1999, among Affymetrix, Merger Sub and GMS. The Merger is described in the Registration Statement on Form S-4 (the "Registration Statement") of which this exhibit is a part. This opinion is being rendered pursuant to the requirements of Item 21(a) of Form S-4 under the Securities Act of 1933, as amended. Capitalized terms not defined herein have the meanings set forth in the Merger Agreement and the documents related thereto. All section references, unless otherwise indicated, are to the United States Internal Revenue Code of 1986, as amended (the "Code"). In preparing this opinion, we have examined and relied upon (i) the Merger Agreement, (ii) the Proxy Statement/Prospectus (the "Proxy Statement") included in the Registration Statement, (iii) the tax representation letters delivered to us by Affymetrix and Merger Sub and GMS in connection with this opinion (the "Representation Letters"), and (iv) such other documents as we have deemed necessary or appropriate in order to enable us to render this opinion. In our examination of documents, we have assumed the authenticity of original documents, the accuracy of copies, the genuineness of signatures, and the legal capacity of signatories. In rendering this opinion, we have assumed without investigation or verification that the facts relating to the Merger as described in the Proxy Statement are true, correct and complete in all material respects; that all representations and warranties contained in the Proxy Statement, the Merger Agreement and the Representation Letters are, at the time they are made, and will remain at all times through the Effective Time, true, correct and complete and may be relied upon by us at the time they are made and at all times through the Effective Time; that any representation in any of the documents referred to herein that is made "to the best of the knowledge and belief" (or similar qualification) of any person or party are true, correct and complete without such qualification; and that, as to all matters for which a person or entity has represented that such person or entity is not a party to, does not have, or is not aware of, any plan, intention, understanding or agreement, there is no such plan, intention, understanding or agreement. We have further assumed that all parties to the Merger Agreement and to any other documents examined by us have acted, and will act, in accordance with the terms of such Merger Agreement and documents; that the Merger will be consummated at the Effective Time pursuant to the terms and conditions set forth in the Merger Agreement (including all covenants and conditions contained therein) without the waiver or modification of any such terms and conditions; that the Merger will be effective as a merger under the applicable laws of Massachusetts; and that Affymetrix, Merger Sub and GMS each will comply with all reporting obligations required under the Code and Treasury Regulations with respect to the Merger. Any inaccuracy in, or breach of, any of the aforementioned statements, representations or assumptions could adversely affect our opinion. Our opinion is based on existing provisions of the Code, Treasury Regulations, judicial decisions, and rulings and other pronouncements of the Internal Revenue Service (the "IRS") as in effect on the date of this 2 opinion, all of which are subject to change (possibly with retroactive effect) or reinterpretation. No assurances can be given that a change in the law on which our opinion is based or the interpretation thereof will not occur or that such change will not affect the opinion expressed herein. We undertake no responsibility to advise you of any such developments in the law after the Effective Time. No ruling has been or will be sought from the IRS by Affymetrix, GMS or Merger Sub as to the federal income tax consequences of any aspect of the Merger, and our opinion is not binding upon either the IRS or any court. Thus, no assurances can be given that a position taken in reliance on our opinion will not be challenged by the IRS or rejected by a court. Based upon and subject to the foregoing, the discussion contained in the Proxy Statement under the heading "Material Federal Income Tax Consequences," subject to the limitations and qualifications described therein, fairly and accurately represents our opinion as to the material United States federal income tax consequences of the Merger. Our opinion addresses only the specific United States federal income tax consequences of the Merger set forth herein, and does not address any other federal, state, local, or foreign income, estate, gift, transfer, sales, use or other tax consequences that may result from the Merger or any other transaction (including any transaction undertaken in connection with the Merger). This opinion is being provided to you solely for use in connection with the Registration Statement, and this opinion letter may not be used, circulated, quoted, or otherwise referred to for any other purpose. We hereby consent to the use of our name under the caption "Material Federal Income Tax Consequences" in the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ Palmer & Dodge LLP EX-23.1 6 CONSENT OF ERNST AND YOUNG LLP 1 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 12, 1999, included in the Proxy Statement of Genetic MicroSystems, Inc., that is made a part of the Registration Statement (Form S-4) and related Prospectus of Affymetrix, Inc. for the registration of shares of its common stock. /s/ ERNST & YOUNG LLP Boston, Massachusetts October 14, 1999 EX-23.2 7 CONSENT OF ERNST AND YOUNG LLP 1 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the proxy statement of Genetic MicroSystems, Inc. that is made part of the registration statement on Form S-4 and prospectus of Affymetrix, Inc. and to the incorporation by reference therein of our report dated January 29, 1999 except for Note 11, as to which the date is March 25, 1999, with respect to the financial statements and schedule of Affymetrix, Inc. included in its Annual Report (Form 10-K) for the year ended December 31, 1998, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Palo Alto, California October 13, 1999 EX-24.1 8 POWER OF ATTORNEY 1 Exhibit 24.1 POWER OF ATTORNEY The undersigned directors and officers of Affymetrix, Inc. do hereby constitute and appoint Stephen Fodor, Edward Hurwitz and Vern Norviel, and each of them, our true and lawful attorneys-in-fact and agents to do any and all acts and things in our name and behalf in our capacities as directors and offices, and to execute any and all instruments for us and in our names in the capacities indicated below which such person or persons may deem necessary or advisable to enable Affymetrix to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for us, or any of us, in the capacities indicated below and all amendments (including post-effective amendments) hereto and we do hereby ratify and confirm all that such person or persons shall do or cause to be done by virtue hereof. SIGNATURE TITLE DATE - ----------------------------- ----------------------------- ---------------- /s/ Stephen P.A. Fodor, Ph.D. Chief Executive Officer and - ----------------------------- Chairman of the Board October 11, 1999 Stephen P.A. Fodor, Ph.D. /s/ Edward M. Hurwitz Vice President and Chief October 11, 1999 - ----------------------------- Financial Officer (Principal Edward M. Hurwitz Financial and Accounting Officer) /s/ John D. Diekman, Ph.D. Vice Chairman of the Board October 11, 1999 - ----------------------------- John D. Diekman, Ph.D. /s/ Paul Berg, Ph.D. Director October 11, 1999 - ----------------------------- Paul Berg, Ph.D. /s/ Vernon R. Loucks, Jr. Director October 12, 1999 - ----------------------------- Vernon R. Loucks, Jr. /s/ Barry C. Ross, Ph.D. Director October 12, 1999 - ----------------------------- Barry C. Ross, Ph.D. /s/ David B. Singer Director October 11, 1999 - ----------------------------- David B. Singer /s/ Lubert Stryer, M.D. Director October 14, 1999 - ----------------------------- Lubert Stryer, M.D. /s/ John A. Young Director October 12, 1999 - ----------------------------- John A. Young EX-99.1 9 FORM OF PROXY 1 EXHIBIT 99.1 GENETIC MICROSYSTEMS, INC. 34 COMMERCE WAY WOBURN, MASSACHUSETTS 01801 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints _______________ and _______________, and each of them, with full power of substitution, as proxies to represent and to vote, as specified below, all the shares of stock of Genetic MicroSystems, Inc., held of record by the undersigned on __________ __, 1999, at the Special Meeting of Stockholders to be held on __________ __, 1999 and at any adjournments, postponements, continuations or reschedulings thereof. The undersigned hereby revokes any previous proxies with respect to the matters covered in this proxy. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER SPECIFIED ON THE REVERSE SIDE. IF THIS CARD IS PROPERLY EXECUTED BUT NO VOTE IS SPECIFIED, THIS PROXY WILL BE VOTED FOR ADOPTION OF THE MERGER AGREEMENT. (continued on reverse side) You can vote by completing, signing, dating and returning the enclosed proxy card in the enclosed stamped envelope. 2 Please mark your vote as indicated in this example: /X/ 1. To adopt and approve the Agreement and Plan of Merger, dated as of September 10, 1999, by and among Affymetrix, Inc., a Delaware corporation, GMS Acquisition, Inc., a Massachusetts corporation wholly owned by Affymetrix, Genetic MicroSystems, Inc., a Massachusetts corporation, Jean Montagu as stockholder representative and the stockholders of Genetic Microsystems, Inc. listed in the signature pages thereto [ ] FOR [ ] AGAINST 2. Vote on the proposal that the merger does not constitute a liquidation, dissolution or winding up of Genetic Microsystems, Inc. (only holders of shares of Genetic Microsystems Series A Convertible Preferred Stock are eligible to vote on this proposal) [ ] FOR [ ] AGAINST 3. To appoint Jean Montagu as stockholder representative to act on behalf of the shareholders of Genetic MicroSystems in connection with the merger [ ] FOR [ ] AGAINST 4. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the meeting or any adjournments, postponements, continuations or reschedulings thereof.
CHECK HERE IF YOU PLAN TO ATTEND THE SPECIAL MEETING: [ ] Dated: ---------------, 1999 ------------------------------- Signature (including title, if any) ------------------------------- Signature if held jointly Please sign your name above exactly as it appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or authorized officer. If a partnership, please sign in partnership name by authorized person. -----END PRIVACY-ENHANCED MESSAGE-----